Rate Hikes Strike Fear into Markets


but Stout Hearts Will Call the Bank’s Bluff

The Bank of England’s decision to finally raise interest rates from their historical low sent a shiver through the UK property market this summer. Coming on top of worries over the financial implications of Brexit, the prospect of rising mortgage rates was always going to dampen spirits – but how realistic is a significant jump in rates?


Arguably, the very combination of uncertainty, inflation and a cautious Bank of England is ideal for property investors who can hold their nerve. The UK property market – and the London powerhouse in particular – was already undergoing a soft patch well before the Bank of England’s announcement. The latest numbers from the Office for National Statistics showed that average house prices in the UK increased by 3% in the year to June 2018. That’s the lowest annual rate since August 2013, and it was driven by a fall in house prices in London over the previous 12 months.


Jonathan Samuels, CEO of the property lender Octane Capital, says it’s hard to foresee an improvement in house prices during the rest of 2018, thanks to a number of factors weighing against the market.


“There’s a widespread caution in the property market at present, caused by the uncertainty of Brexit and the ongoing squeeze on household income, as revealed by the latest July inflation data,” he said. “Households are wary of taking on more debt, all the more so following the recent interest rate rise”.


In fact, the annual growth rate has been slowing since mid 2016 – predating even worries over Brexit. Back then, the outlook for Britain’s economy was especially rosy; it was outperforming most other Western economies in terms of growth, and the unemployment rate was tumbling. The one factor that has been consistent is the fear of a rate hike, because central banks tend to raise rates under those exact circumstances.


When the rise actually came, we got confirmation of the extent to which it really worries homeowners. A survey for AA Financial Services looking at future demand for property and tracking people’s intentions to move, showed an immediate impact from the decision. The proportion of Brits looking to move had been consistent all year at 8%, but dropped to 6% in the 48 hours after the Bank of England’s announcement at the beginning of August amid fears that mortgage costs would increase.


This is only to be expected: Homeowners and buy-to-let investors alike have benefitted from a decade of cheap money, and the thought of returning to the kind of borrowing rates that were normal before the financial crisis is daunting. Paying 6% or 7% a year on a mortgage at current prices is not sustainable for many. However, there are good reasons to believe that is unlikely.


Indeed, the primary effect of interest rates on markets – both for property and stocks – can arguably be seen in the anticipation. Again and again since 2008, we have seen stock markets fall on good economic news because traders believe it increases the chance of central banks finally raising rates. Similarly, many property investors and homeowners have remained relatively cautious and have not taken full advantage of the cheap money on offer, because they fear being trapped when interest rates rise. Naturally, a degree of planning and caution are commendable, but the fact is that, in this case, it has not been rewarded.

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