Interest Rates and the Property Market April 07

The question that most investors are asking right now is ‘how far will The Bank of England push up interest rates in 2007’.

The consensus a few weeks ago on rates was that the Bank would raise rates two more times this year by a quarter point - first to 5.5% in May then to 5.75% November..

However although annual inflation rose to 3.1% in March - Mervyn King, the chairman of the Bank of England monetary policy committee (which decides on monthly rate issues), stated that ‘there could be a sharp fallback in inflation over the next four to six months’ and indicated ‘that rates are now edging towards restrictive’.

If indeed inflation does fall back towards the end of this year we could start to see rates start to decline in 2008.

There has been quite a bit of speculation in the press that many smaller Buy-to-Let landlords have bought too late in the housing cycle and that they may start to get into financial difficulty as interest rates rise and house prices stagnate or fall.

This will only happen where landlords have bought at low yields, ignoring financial prudence, and are gambling on price rises to show a profit on their investment. As long as rents show a profit on interest rate costs buyers have no reason to sell and will not do so even in a falling housing market. They will take the long term view that demand will inevitably be more than supply in the UK where there is a long term shortage of affordable housing combined with a shortage of land and restrictive planning laws.

As house prices have risen lenders have offered more innovative schemes to entice
borrowers into the housing market. The most interesting change has been the lengthening of mortgage terms from the 25 years standard term to 35 and even 45 years. This new term supports the market as clearly monthly payments on an interest and repayment mortgage fall substantially as the length of the loan period is extended.

Low unemployment which the UK is currently experiencing and immigration from Eastern Europe also supports house prices. And Scotland is experiencing a flood of
Polish people in particular into the country as they perceive Scots as more friendly and welcoming than our English neighbours.

This immigration to the UK also helps hold down inflation. Everyone knows that tradesmen in the UK were charging more and more for their services a few years ago.. Indeed many householders had become frustrated at ‘not being able to get a plumber at any price’
In the natural scheme of things this would have led to more people training to become plumbers as they saw an opportunity to make money – But there would have been a lead time of several years before newly trained plumbers would be available.

However the influx of tradesmen from Eastern Europe has filed the gap overnight and prices have stabilised and wage inflation has been halted. In addition immigration has helped to hold down prices so that present wages stretch further.

All these immigrants need somewhere to live and thus help to support Buy-To-Let investors – particularly in Scotland.

Ken Taylor
30th April 2007