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“Take a hike!” Housing market likely to shrug off interest rate rise

November 2, 2017Article by Paul Avery

This morning’s big news in financial circles is the Bank of England’s announcement that it is raising interest rates to 0.5% – a move that has been expected for some time. The rate rise will have a modest effect on the mortgage market, but it is also a signal that the economy is performing better than expected and that monetary policy is returning to business as usual before the EU referendum.

That wider pattern is good news for the housing market overall, and the fundamental imbalance of supply and demand points to prices remaining resilient in spite of today’s rate increase.

Putting the rate increase in context

It is true that this is the first time that the base interest rate has been lifted in a decade – that is certainly a subject worth talking about. However, to put things into perspective, the rate is only returning to 0.5% – the same level it has been at for nearly a decade, from the 2009 financial crisis, right up to the Brexit referendum.

Prior to the financial crisis, interest rates were above 5%, having risen steadily since 2003, and this did little to slow the growth of house prices during that bonanza. The BoE has indicated that future rate rises will be extremely gradual, perhaps another 0.25% in a year’s time, and another a year after that.

Across the pond, interest rates have been rising at a similarly glacial pace, and the end of quantitative easing at the European Central Bank is expected to have similar consequences. Today’s hike in the base rate is not a circumstance peculiar to Britain – it is part of a very gradual shift in the world economy as it emerges from the lingering effects of the financial crisis.

The drivers of that shift are all positive for house prices in the long term, outweighing the effects of marginally more expensive mortgages in the short term.

The effect on households and homebuyers

Two numbers are often quoted as the causes of the rate rise. The first is that GDP grew by 0.4% in the last quarter – above expectations and suggesting to some commentators that the original cut (in anticipation of a referendum-induced slowdown that has not materialised) was unnecessary in the first place. This bodes well for the employment market.

The second is that inflation now sits at 3%, above the BoE’s 2% target, which in theory means the economy is overheating and needs to be tempered. Raising interest rates does this by making saving slightly more attractive than it was before, in comparison with spending.

The slightly higher cost of debt, then, is offset by higher interest rates on savings, tipping the balance in favour of thriftier households. But savings accounts will still be offering no more than 1.5% – nowhere near the returns available to investors in the rental market. Overall, monetary policy still overwhelmingly favours borrowers – including mortgage borrowers – over savers.

About 60% of mortgages are on fixed rates, avoiding any effect whatsoever for the remainder of the fixed term, while the other 40% may be modestly affected. On a typical £150,000 loan, investors will be exposed to around £15 per month of extra mortgage costs – hardly enough to discourage purchases and a relatively insignificant dent to investor yields.

Outlook on the property market

Moody’s credit rating agency reacted that: “house price growth and the market’s overall stability have been incredibly resilient despite the EU vote and a snap general election. A few quid added to the average mortgage repayment will not deter this growth in the medium to long term.”

Indeed, the 0.25% rate rise is a small incremental change. It was expected, and is furthermore necessary for the wider economy, which is a much more significant driver of the housing market overall.

Mortgage costs now rising a shade above historic lows will do little to dent the UK’s fundamentals, which still exhibit robust demand – particularly given the circumstances – and extremely limited supply. Especially in regional towns beyond the mainstream with high yields and no danger of oversupply, such as Halifax and Doncaster, excellent returns and solid growth potential will remain for the foreseeable future.

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Paul Avery

Paul joined us in 2016 to lead our in-house research efforts, producing reports and guidance for clients as well as the strategic market analysis behind our new project launches. His background is in sustainability in the construction sector, and he is currently being trained in property valuation to further bulk up his investment creds.
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