It seems to be a daily discussion, whether or not the Bank of England will increase UK base rates in the short to medium term and if so by how much. You could in many ways argue that the Bank of England is giving mixed signals at the moment because one day it seems as though an interest rate rise is imminent only for these hopes to be dashed. The fact remains that UK base rates will likely rise at some point during 2014 but what kind of impact would this have on the UK property market?
Before we look at the potential impact an increase in base rates would have on the UK property market, it is difficult to see why the Bank of England is questioning rising property prices although unwilling or unable, as yet, to use the most direct tool available to them, an increase in base rates.
Cheap finance fuels property boom
While UK base rates remain at historic lows it is not difficult to see why the UK property market might seem attractive to investors looking for short to medium term opportunities. The chance to use relatively cheap finance to acquire properties which may offer yields anywhere from 4% at the luxury end of the market to in excess of 10% for those offering limited capital growth but steady rental income is very attractive to many investors.
Quote from PropertyForum.com : “Are clever investors turning net sellers of UK property?”
The opportunity to acquire UK property probably looks even more attractive when you take into account the minimal interest rates available on savings accounts at this point in the cycle. The ability to lock in rental yields which could be in excess of 10% therefore allows your capital to effectively grow at a faster rate than inflation. When you compare this to savings accounts which may pay around 1%, with inflation at 3%, in effect your capital is decreasing in real terms year-on-year.
Would a rise in UK base rates rock the property market?
To a certain extent the UK property market, and UK financial markets, are already factoring in an increase in UK base rates by the end of 2014. This may only emerge as a quarter percent rise but it will signal the end of historically low UK base rates and a turning of the cycle. It would seem fairly obvious that as and when the cost of finance in the UK increases this will have a double impact upon the UK property market. The cost of finance will increase while at the same time those who may have been looking for alternative homes for their savings, which currently attract little in the way of interest, may begin to move away from the property market to other areas of the financial arena offering better value.
The whole idea of an increase in UK base rates will need to be critically timed to ensure that it does not cut off the ongoing UK economic recovery with the UK one of the leading economies in the world at this moment in time. This is obviously a very fine balancing act for the Bank of England because it will have a potentially enormous impact on not only the property market but the short to medium term performance of the UK economy as a whole. Not a position anybody would wish to be put in!