Optimistic outlook for UK property market despite interest rate rise

Yes, the Bank of England’s Monetary Policy Committee announced a 0.25% rise but this takes the rate back to where it was 18 months ago and I really believe it is not a big deal. Some home owners will pay slightly more if they are not on a fixed rate deal but some lenders are actually reducing rates and while announcements over rises can be expected, this is not going to be enormous.

This interest rate was widely expected. The markets, the banks, the Treasury, everyone knew it was going to happen and what is far more interesting is the latest five year forecasts that have been published by some of the big hitters in the property industry.

They reveal that over the next five years the residential market is expected to see steady cumulative growth even with expected interest rate rises between now and 2022. JLL forecasts interest rates could reach 2.25% and Savills suggests 2.5% which would take the average mortgage interest rate to around 4%.

This is not a doom and gloom scenario. According to Ian Kernohan, economist at Royal London Asset Management, as long as interest rates rise very gradually from here, then with around 60% of mortgages on fixed rate deals, the impact on household finances shouldn’t be too severe, and will be offset by any future fall in inflation.

June Deasy, head of mortgage policy at UK Finance, pointed out that the majority of borrowers will be protected because they have a fixed rate mortgage. The figures show that over the last year some two thirds of first time buyers have opted to fix their rate for up to two years, with a further one opting to fix for two to five years.

Rates remain very low by historical standards and borrowers remain well placed to get a good deal from the UK’s increasingly competitive mortgage market as 0.5% is still a historically low rate.

The forecasts for price growth paint a picture of a steady ship rather than boom and bust which must be welcomed. Savills predicts growth of 14% from 2018 to 2022 and this assumes a base rate of 2.25% by then.

But there will be considerable regional variation from growth of 18% in the North West of England to just 7% in London over this period, although the firm adds that London’s prime markets will show stronger growth. Prime central London could see growth or 20.3% and outer prime London growth of 10.2%.

Average price growth of 2.5% per annum is forecast by JLL as the market is likely to be still adjusting to varying levels of political and legislative change and it concludes that despite the intrusion of Brexit, the outcome will be a more stable and healthy UK housing market.

JLL describes the change as ‘structural’ and says it might take some getting used to but in the end it will be good for Government, the economy, buyers, sellers and industry participants and lay the foundations for a less volatile UK housing market in the medium term.

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Strutt & Parker also forecasts steady growth of 2.5% next year and in 2019, followed by 4% in 2020, 2021 and 2022, giving a cumulative rise of 18%. But the prime central London market is likely to be flat in 2018.

It should be remembered that there are far greater potential issues for the housing market, namely lack of supply and stamp duty. Indeed calls for the Chancellor to make some kind of property market change in the upcoming Budget are increasing again. Personally I think the best option is to raise the threshold where stamp duty kicks in if the Government wants to genuinely help first time buyers, especially in London.

Recent research from Lloyds Bank showed just how much buyers who work in London can save if they move up to 60 minutes away even taking the high cost of rail travel into account. Although Build to Rent is being championed by developers and the Government as the solution for professional first time buyers, once they want to start a family they will dream about a house rather than a flat, and that is where a continued lack of supply comes in.

We need to build the kind of homes that people want. New build apartments in London have not been selling as well as expected which suggests that this is not what buyers want. So developers and Government needs to think about what type of homes the nation needs and where and get building.