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The Bank of England has voted to raise interest rates for the third time in four months. The Monetary Policy Committee voted almost unanimously to increase the bank rate from 0.50% to 0.75% on the 17th of March. The decision means that interest rates will return to their pre-pandemic levels, the highest level since 2009.
Whilst the intricacies of central bank policy may not make for entertaining reading, they can certainly have a significant effect on the national housing market. Rising rates affect property prices in a number of ways and are often seen as a headwind for property investors and landlords. So, what does the Bank of England’s decision mean for the UK’s community of landlords?
Rising Interest Rates Mean a Tightening of Property Investing Conditions
Overall, rising rates are considered to be a negative headwind for property investors. When the Bank Rate rises, mortgage rates soon follow, increasing the cost of borrowing. Investors operating on variable term mortgages will begin to see their monthly rates rising, whilst investors taking out new mortgages will struggle to achieve the same rates that they might have six months ago. With mortgage rates being one of the largest costs in most property portfolios, this will likely lead to a tightening of net yields.
Unfortunately, rates are not rising in isolation. The Bank Of England’s primary role is to control inflation, which has risen to 5.5% on the back of increased energy costs and rising goods prices. Investors may see their rental returns squeezed by rising interest rates, with the remainder eaten away by inflation as high as 7.25% in April 2022. This means that not only may net rents fall, but the value of the remaining rents may also be eroded by inflation.
How do Rising Interest Rates Affect Rental Growth?
All of this has knock-on consequences for property prices and rental growth. Rising inflation is set to accentuate a cost-of-living crisis throughout the UK, with everyday citizens experiencing a noticeable squeeze in their disposable incomes. As the cost-of-living increases, tenants may struggle to afford rents, slowing rental growth and further squeezing yields. Equally, higher interest rates and inflation will subdue economic growth and weaken the support for further house price growth.
Is There Anything Positive About Rising Interest Rates?
Admittedly, it is difficult to frame rising rates in a positive light, however, it is worth considering the UK’s interest rates in a historical context. Whilst they may have returned to their ten-year highs, they are still unfathomably low from a historical context. Those landlords who are longer in the tooth will be able to remember rates well in excess of 5% or even 10%. Interest rates and mortgage rates are and will continue to be, very low by most historical measures. What is more, it is extremely unlikely that rates will rise above their pre-2007 levels.
Is Property Still a Good Investment Despite Rising Interest Rates?
Equally, despite the rising rates, property is and will continue to remain a fantastic long-term investment. If you can forgive the technicalities of economic writing, whilst absolute (nominal) rates might be rising (from 0.50% to 0.75%), real rates remain heavily negative. That is, inflation is significantly higher than parking your cash in a bank account and earning interest. Whilst in the short-term, rental yields may be squeezed, the return on property will still remain significantly higher than investing in other income-producing assets. Equally, housing has proved to be a great inflation hedge over time, with inflation often driving further house price growth and reductions in loan-to-value over the long term.
Looking Forward – Property and Interest Rate Forecast
Unfortunately, with inflation rising as it is, it is unlikely that this will be the only increase in interest rates in 2022. As Landlord Vision wrote in November last year, rates may rise to or even beyond 1.00% in 2022 and the recent developments in Ukraine and around the world have only increased the odds of this. As such, it remains prudent advice for investors to lock in longer-term fixed-rate mortgages whilst they still can at the current rates.
Typically, rising rates have a negative relationship with house prices. As rates rise, the ability to afford homes falls and thus house prices tend to fall in tandem. However, irrespective of rising rates, the UK’s chronic supply and demand imbalance will remain and house prices themselves are unlikely to fall. It is more likely that we will see house prices falling in ‘real’ terms, that is after accounting for inflation. If house price growth stalls or slows to a modest level whilst inflation continues to rise, their real value may fall. In essence, whilst your property may continue to list for £250,000, that number won’t be worth what it was 12 months ago.
Taking a step away from our individual portfolios, a slowing in house prices may be a positive for the market in general. As many will openly acknowledge, the housing market has been close to a boiling point since the pandemic, with an acute shortage of worthwhile investment properties being listed and prices rising faster than incomes. If house prices were to pause, it may allow for investors to spot and find better investment opportunities in the market.
Disclaimer: This Landlord Vision blog post is produced for general guidance only, and professional advice should be sought before any decision is made. Nothing in this post should be construed as the giving of advice. Individual circumstances can vary and therefore no responsibility can be accepted by the contributors or the publisher, Landlord Vision Ltd, for any action taken, or any decision made to refrain from action, by any readers of this post. The opinions reflected in this post are not necessarily opinions held by Landlord Vision. All rights reserved. No part of this post may be reproduced or transmitted in any form or by any means. To the fullest extent permitted by law, the contributors and Landlord Vision do not accept liability for any direct, indirect, special, consequential or other losses or damages of whatsoever kind arising from using this post.
