When Governor of the Bank of England, Mark Carney, recently announced that interest rates would have to start to rise sooner or later he, whether consciously or not, fired a warning bell that could cause a headache to the property market. I do stress the word ‘could’ here, though…
Let’s look at the reality of the situation: interest rates have been at an historic low of 0.5% since 2009 and it would be foolish to believe that they’d remain this way indefinitely, given it’s one of the longest periods of rates remaining level in the Bank’s 300 year history.
In that respect, Carney was simply doing his job. He didn’t place a specific timeframe on any such rise, he simply mooted it as a future occurrence – no surprise there! His words, however, do provide those of us operating in the property sector with some food for thought.
First things first. Mark Carney described how he foresees rates rising slowly and gradually to a point whereby they eventually settle at around 2.5%. Even so, this could instil fear in anyone who has joined the market in the last eight years and who, as such, isn’t familiar with such changes.
I believe, however, that if and when rates do go up, new policies such as the Mortgage Market Review (MMR) will have already ensured that the reckless lending of the past is history and all those with loans taken out in recent years should feel confident that they can afford any future incremental rises.
With Mark Carney’s announcement, however, I’d foresee borrowers now most probably selecting fix term mortgages of two, three and five year terms. Those on variable rate products who fear their ability to afford any future rate increases would certainly be well advised to consider making such a switch – and soon, before lenders start to adjust their pricing accordingly. Personal circumstances will naturally play a role in deciding how to best mitigate the impact of a future rate rise, and anyone with plans to move would be advised to only opt for a fixed term product in line with their plans so as to avoid any costly penalties.
Of course, the very fact that an increase has been mooted means that a mini boom in the market could be created as purchasers scramble to take advantage of lower lending rates before an increase takes effect. While on face value this would appear to be a positive thing for those of us in the industry, we’d all be wise to remember that it’s likely to only be a temporary state after which the impact of a rise would take hold.
Property investors, meanwhile, already rattled by the reduction of landlord tax relief may also fear Carney’s prediction and it’s possible that when such an increase impacts, we’ll see a knock-on effect for rent levels.
Returning to what we know though, post-recession UK whilst enjoying a certain level of economic buoyancy is still experiencing fragility in some respects. Unemployment recently rose for the first time in two years and UK households still remain some of the most indebted of any major economy. While outside of Government control, it is unlikely that they’d want to see interest rates rise too quickly.
Where does this leave us? Well, we should remain assured of Mark Carney’s cautious but realistic view in to the future and as an industry use his words as an opportunity to be prepared for supporting our customers as they potentially navigate rate rises for the first time.
Of course, there is always the other side to any story and whilst rate rises may well be dreaded by borrowers, they will be embraced by savers, not least of all those saving to make an entry in to the market.
This story is far from over and can only be continued once we have further clarity on likely impact dates and percentage increases. Put simply, we shouldn’t panic yet!
*Michael Robson is Chief Executive of Andrews Estate Agents