Property industry reacts as interest rates rise

The Bank of England has raised interest rates for the first time since July 2007. The official bank rate is now 0.5 per cent, up from 0.25 per cent.

Mark Carney, the Bank of England governor, has said the rate is likely to rise twice more over the next three years.

Property industry bodies have reacted to the news.

Paresh Raja, CEO of leading bridging specialist MFS said:

“In light of rising inflation and stagnating economic growth, the decision to increase interest rates for the first time in a decade comes as no surprise. Nevertheless, it is important to note that the rise in interest rates will place an added financial pressure on first-time buyers and buy-to-let investors needing to borrow money. While the impact on the UK property market may not be immediately obvious, there is no question that this month’s upcoming Autumn Budget now takes on greater significance as it must find ways of alleviating stress and providing support for property buyers. With the interest rate now sitting at 0.5%, this is a prime opportunity for the Government to address issues like real estate demand and Stamp Duty to ensure the market remains buoyant and readily accessible for homebuyers and investors alike.”

Founder and CEO of eMoov.co.uk Russell Quirk commented: 

“A fair adjustment to interest rates and one that takes us back to the pre-referendum ‘norm’ of 0.5%. This should do little to phase homeowners and buyers on variable rates with the average homeowner out of pocket an extra £16 or so a month, and water off a duck’s back for those with a fixed rate security blanket.

“While the wider economy to some extent has been comatose since the Brexit vote, it has started to show signs of life in terms of manufacturing and employment which should continue to build.

“Where the UK property market is concerned, there is certainly no cause for panic as we are unlikely to see any further adjustments too soon down the line and it is very unlikely that we will return to the extraordinary highs of the late 80s, when many fell into a financial black hole.

“For UK Property PLC, today’s announcement should be met with a distinctly apathetic approach. There’s nothing to see here.”

Mario Berti, CEO of specialist lender Octopus Property, commented:

“The MPC’s decision to raise rates was expected and its impact on the residential property market in the short term will be limited, primarily because most people are now on fixed rate mortgages.

“What really matters is whether this signals the beginning of a meaningful increase in the cost of money and what impact that would have on consumer confidence over the longer term.  Given the high levels of personal debt, a swift increase in rates to pre-GFC levels would likely see the stagnant property market experience uncomfortable falls in transaction volumes and prices, but this is unlikely.

“Given the uncertainty the UK economy faces as a result of Brexit, a significant increase in rates would be a surprise.  Sustained low rates will support prices as will the ongoing structural shortage of housing in the UK and the weakness of Sterling.  That will be positive for consumers, the UK economy and for specialist lenders like us who offer property buyers speed and flexibility.”

Simon Gammon, managing partner at Knight Frank Finance said:

“We are witnessing the Bank of England raising their base rate for first time in a decade. It has been a long 10 years since the base rate last went up, so today represents the first time many UK borrowers will have ever experienced an increase in their mortgage payments. The 0.25% lift in the base rate will likely be passed on to borrowers on variable rate mortgage deals almost immediately – with a material effect. Although the base rate is still just 0.5%, this quarter point increase translates into an extra £250 a year in interest for every £100,000 of borrowing. Someone therefore with a £500,000 mortgage will be paying more than £100 extra in interest every month. Only those on a fixed rate deal are likely to avoid some sort of increase.

“The question is, does this rate rise signal the start of a series of future base rate increases? While it could be actioned over a long period of time, is the country finally starting to move towards a normalisation of the base rate away from ultra-low levels? Libor and swap rates, the money market rates which determine fixed-rate pricing had risen in anticipation of the rate rise, and this may continue if further rises are anticipated.

“As mortgage lenders adjust to this new landscape, home loan deals are likely be launched and withdrawn at a rapid pace. In a rising rate environment we can expect the mortgage market to become more volatile for a while. Mortgage lenders, keen to meet their lending targets, will continue to play with rates to ensure they are in the best-buy tables, resulting in some ‘jostling’ in the market. When rates are being launched and withdrawn so quickly, borrowers will want to make sure they have access to the most up-to-date information to enhance their opportunity of getting the best deals.

“The argument for taking a fixed rate, is ever stronger. Borrowers who spot a good mortgage deal in the coming months should grab it.”

James Roberts, chief economist at Knight Frank commented:

“An increase in the base rate is often viewed with trepidation by the property industry, but this long expected move is unlikely to have a negative impact. I expect the Bank of England will follow the same strategy as the US Fed, and gently apply the brakes while giving lots of advance warning, in order to balance the competing pressures of normalising rates while not derailing growth.

“Consequently, I see a gradual rise ahead, partly to stockpile some future rate cuts should the MPC need to combat another downturn at a later date. Also, the Bank of England is showing some younger homeowners that rates do actually rise, given how long it has been since the country saw an increase – the last UK rate hike in 2007 came a few days after the first iPhones went on sale.

“For commercial property, it should be remembered that debt has played far less of a role in the market in recent years than was the case prior to the financial crisis. Commercial property yields are not strongly correlated to interest rates, so I do not see a small rate increase having much of an impact. Indeed, in some markets the re-emergence of rental growth, such as for offices in districts popular with technology firms, should keep investors active.”

Grainne Gilmore, partner, head of UK residential research at Knight Frank said:

“The first increase in the base rate in a decade is a notable event, especially as there is a feeling that this may be the first step in a series of rate rises. However, seen in isolation, this quarter-point rate rise only reverses the cut seen last year, and the base rate is still at a historic low. Even if there are two more rate rises in the next year or so, the base rate will still be at a notably lower rate than seen in any other period of history since the Bank records started in 1690.

“Some mortgage holders will see their repayments affected by the change in rates, and mortgage rates on new home loans will rise, but in terms of the residential market, the move is unlikely to have an impact on overall pricing, although some rents may edge up if buy-to-let landlords affected by the change pass on their increased costs to tenants.

“However, if there is another rate rise in the coming months, confirming the country’s move into a rate rise environment, this may have a wider  effect on sentiment in the market.”

Steven Cook, structured property finance, Investec, commented:

“The interest rate rise is likely to be welcomed by some in the real estate sector and reflects the wider optimism around the UK’s economic outlook. Market uncertainty has impacted both the residential and commercial development pipeline in London and the South East, which have been stuck in limbo since last year’s EU referendum, and if this measure can bring down inflation, particularly in construction costs, this is good news.

“Whilst the weak pound has helped support the UK commercial property market, this is unsustainable and a stronger currency will, in the long-term, support development activity across the UK. What today’s decision doesn’t address is the ongoing Brexit uncertainty which is impacting large parts of the UK real estate market, whether it be student accommodation, City of London office investment or the shortage of suitable housing.”

David Hollingworth of L&C Mortgages commented:

“Although the rate rise only takes Base Rate back to the same level as before the post-referendum cut in August 2016, it’s significant as will represent the first ever rate rise for a generation of mortgage borrowers.

“Those on variable rates are of course the most vulnerable to a rate rise and they should expect to see their monthly payments lift.  That could put a further squeeze on monthly household budgeting which has felt the pinch of higher inflation feeding through.

“Lenders passed on the rate cut last year and so it will be of little surprise to see their variable rates edge back up.  An increase of 0.25% on a £150,000 standard variable mortgage at 4.5% over 25 years, would see payments rise by more than £20 per month.

“Worrying about what a lender will do with their standard variable rate can be something of a red herring considering how competitive mortgage rates are for those that shop around.  In our experience at least 90% of borrowers (and currently more) have been fixing in recent years.

“Those that have so far failed to take advantage of the record low fixed deals will find that rates have already edged up as expectation of a rate rise increased.  Nonetheless borrowers can make big savings over SVR and also protect against any future rate rises”.

Frazer Fearnhead, CEO of the property crowdfunding company The House Crowd said:

“I sincerely hope all the banks will have given as much thought and effort to increasing interest rates for investors today as they will have given to helping people maintain their mortgage repayments and loan agreements. For the past decade investors have been forgotten and suffered derisory levels of returns on their savings. So, it is crucial that banks, increase interest rates on savings just as quickly as they increase interest charges to borrowers.”

Guy Gittins, head of sales at Chestertons said:

“Today’s very small increase in the Bank of England base rate is actually good news for the housing market. The knock-on effect will most likely be that Sterling value will increase, potentially demonstrating that we are in a stronger position today than we have been in recent times and giving added confidence to overseas buyers currently looking at opportunities in within the UK.

“The housing market has already demonstrated resilience in the face of the snap general election and EU vote, so this is unlikely to have a significant effect. Whilst it does mean that monthly mortgage payments will rise marginally for those on variable rate mortgages, the degree of impact on individual households depends on the size of the mortgage.  For the vast majority, although inconvenient, the small rise will be manageable, equating to approximately £30-£60 more per month on a £300,000 mortgage.  It will also benefit those with savings who will likely start to see higher returns.

“The majority of mortgage lenders have already withdrawn lower rate products and relaunched new mortgage deals ahead of this increase, with the remaining lenders set to reprice following this announcement.

“Mortgage broker, Springtide Capital, predicts that interest rates will remain at this level for at least the next six months and probably longer, as the Monetary Policy Committee assess whether the rate rise has had the desired impact of curbing inflation. We feel it is unlikely that rates will continue to rise aggressively given the fragile state of the economy, but borrowers would be wise to act sooner rather than later to take advantage of the remaining historically low rates.”

Emmanuel Lumineau, CEO at BrickVest said: 

“Today’s announcement is momentous for the UK economy and should signal the start of a series of gradual increases. The Bank of England has decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. The decision also signals that the UK economy has not performed as weakly as the Bank predicted last year.

“Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.

“We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.”

John Elliott, managing director of Millwood Designer Homes commented:

“The rate of 0.25% interest unfortunately couldn’t last forever, as it was an unsustainable level in all regards. Following this announcement, I believe the increase to 0.5% is not the end of the world, as on average a significant amount of households will only face rises of between £11 and £12 a month, according to UK Finance. I think this really came down to being realistic, in terms of the wider economy. Many financial institutions have already discounted the rising interest rates and as stated, for individuals, it should not make much of a difference, with many mortgages and loans not expected to see immediate impact. Moreover the Bank of England expect future increases to be confined to 0.25% and only reach the dizzy height of 1% in 3 years time. In terms of the housing industry, I do not expect this to have too much of a wide-reaching effect and with the Chancellor’s Autumn Statement coming up, I believe we should remain positive.”

Andy Robinson, CEO of the Colmore Tang Construction Group of companies said:

“It had been more than a decade since we’d seen a hike in interest rates, so we were expecting the announcement,” said Andy. “We had already accounted for the increase by pricing it into our business plan.

“We do not envision the rise will affect our decision-making processes, especially since demand for construction and development continues to run very high in Birmingham and across the UK generally.”

CEO of Property Frontiers Ray Withers said:

“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. 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.

“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.

“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.”