What impact will the Bank of England’s interest rate cut have on the property market?
Yesterday saw a change to the Bank of England Base Rate from 0.5% to 0.25% which is the first movement in interest rates in 7 years. Interest rates are reviewed on the first Thursday of every month by the Bank of England which now runs independently of the UK government.
The new Chancellor of the Exchequer, Phillip Hammond welcomed the change and commented;
“The measures were intended to support the economy during “this period of uncertainty, as we negotiate our exit from the European Union.”
“We will now look very carefully at the data that’s published over the summer and the OBR report in the autumn, to see what’s actually happening in the real economy, in response to what was a very large package that the governor has announced.”
“As we approach the autumn statement we’ll consider whether there’s any need for a fiscal response.”
What does this mean for the UK property market ???
The rate reduction today is as a direct consequence of the country deciding to leave the EU at the end of June. The decision was taken to ensure that the economy remains strong whilst we go through a period of uncertainty, negotiating terms for the departure of the UK from the EU.
In some areas of the UK, especially in central London, there has been a reduction to the number of property transactions. This is because our city centres, across the UK, benefit most from the most foreign investment but when there is uncertainty of any kind, this foreign investment will normally hold of making large cash injections until things calm down, the media finds something more interesting to report (thank goodness we have the Olympics) and things return to a sense of calm.
Uncertainty of any kind would make anyone to become more hesitant when considering a large purchase of any kind, especially an investment as big as property. Based on yesterday’s news, this will change over the coming months.
2008 was the worst year we all experienced in property. You could not even give a property away in some parts of London and the UK. For a period of 6 months property prices came close to halving. As the saying goes “Fortune favours the brave” and by 2009 prices recovered. 2009 and 2010 were very strong years for everybody involved in property sales.
The similarities today are very strong to compare this moment in time to 2009/ 2010.
With the official Bank of England lending rate at 0.25 % and the Governor of the Bank of England stating that banks must pass on this rate reduction to the consumer we should start to see mortgage rates being offered at close to 1% . This is as close that you will ever see in your life time as FREE MONEY. A 1% mortgage rate is insane and if you stop to think about it for 1 second every adult with a pulse should at least enquire if they can get a mortgage or enquire if they can buy a bigger property.
Unfortunately the public are often accused of acting like ‘sheep’ by the media and therefore it will take something more than an offer of practically free money. The most important factor is of course confidence and I believe this confidence has arrived but maybe hasn’t quite been recognised yet by the so called ‘sheep’.
There are four reasons why I believe this to be the case.
- Brexit despite what we were told hasn’t led to an economic doomsday, (well it did for a few hours anyway) The FTSE recovered and is far higher than pre-Brexit. The FTSE is higher because Brexit is now being looked at as an exciting opportunity. Despair turned to opportunity leads to a new found confidence. The city as well as business can sense this confidence is not far away.
- The new government has abandoned an economic austerity plan and this will lead to the sheep feeling positive and will lead to growing confidence over the next few months. The new chancellor will be painting a very different picture when it comes to the autumn statement and after we hear these new measures confidence will continue to grow.
- Our holidays if we can afford them are more expensive due to the fall in the pound against the dollar and euro however on the positive side what we are beginning to see is the foreign investor returning to central London to buy property. The press have not caught on but they soon will. The pound has dropped by 20% against the Euro which to a European represents a 20% drop in the value of UK property. This is a similar picture across most currencies. This is nothing short of a bargain. The buyers are back deals will be done and by the autumn the press will be reporting activity and price rises in central London. Confidence returns when buyers hear prices are beginning to rise. The ‘sheep’ change direction and they all try to buy the same property.
- Earlier this year, the rental investor and those wishing to purchase a second home saw an unwelcomed increase to stamp duty. Foreign investment is now receiving a significant discount thanks to the current exchange rate and this now makes buying UK property significantly cheaper even with the increased stamp duty.
- Quantitative easing has returned. Another description of this phrase which hasn’t been used much since 2009 / 2010 is The Bank of England prints money and distributes it to the finance sector. Direct result confidence increases and the sheep start to run.
- The banks are lending. During the global recession the banks simply did not have the money to lend to buyers so it was difficult . This is not the case today and the banks are currently offering some fantastic rates and are more open to potential buyers; even those without perfect credit profiles.
It is not going to feel it today especially in August as we are affected by the typical seasonal trend of the summer holidays but we have turned a corner. We are going to have a positive and confident September through to mid-November and I know this will continue for the next two years at the very least, whilst we negotiate on what terms the UK’s departure from the EU will be on.
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