Cheap finance and property investment

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We only need to look back at the 2008 worldwide crash which took many investments by surprise and led to the worst depression in living history. Stock markets were crashing, many countries stood on the verge of bankruptcy and the property markets were shaken. This forced central banks around the world to slash interest rates as a means of providing cheap finance to fund economic recovery. While nobody expected low interest rates to instigate a recovery overnight here we are eight years later with interest rates still at historic lows.

Central bank assistance

Central banks right across the world were forced to openly participate in money markets to ensure liquidity remained as high as possible. Indeed today we still see many central banks around the world buying up bonds as a means of maintaining liquidity. This has led to a period in which property has been one of the better performing assets due in the main to relatively low finance costs.

In addition to historically low base rates, and as a consequence low finance rates, many governments around the world have also introduced help to first-time buyers. It is not difficult to see why demand for real estate has remained relatively strong since the worldwide crash and indeed why many experts believe property will be one of the better performers going forward.

Feeding demand for property

It has to be said that a number of property investors in the UK and around the world would not have been able to acquire the properties of their choice if base rates were at “traditional levels”. The cost of finance would inevitably be much higher and there would certainly not be as many help to buy schemes if we were back in traditional economic times. So, while many experts continue to talk down the UK property market, and many other markets around the world, investors would appear to think otherwise.

It is also interesting to see the significant reduction in the UK currency, which has fallen nearly 20% since the Brexit vote, and the consequence this is having on foreign investment. The problem here is that traditionally the UK government would increase base rates to protect the exchange rate but increasing base rates would make finance more expensive thereby reducing corporate investment and consumer spending – and ultimately leading to an economic decline. So, as sterling continues to struggle more foreign investors are casting more than a fleeting glance over the UK property market.

Future base rates

It is ironic that the UK government was forced to reduce base rates in light of concerns about the UK economy and Brexit despite many people predicting a more prosperous long term future for the UK outside of the struggling EU. As a consequence it is highly unlikely that UK base rates will rise in the foreseeable future and even the US authorities, having increased their own base rates earlier this year, would appear more likely to reduce base rates than increase them.

When you bear in mind that savings rates are minimal to say the least, and UK inflation is currently under control, buy to let rental yields often approaching double digits would appear to be a godsend. Even though there are concerns about how Brexit will impact the UK property market those looking longer term are starting to see good value in some areas of the UK buy to let market. If, as we fully expect, finance costs do remain low for the foreseeable future this should help to support property markets for some time to come?

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