Following on from our Outlook this week, the Bank of England yesterday increased the base rate to 4%, up from 3.5%. Interestingly the Chief UK Economist at Nomura, George Buckley said " the bank’s end-horizon view for inflation remains exceptionally weak". The FT today notes from those comments that "the underlying message from the BoE inflation forecast was therefore that, if they turn out to be correct, interest rates could soon be falling quite quickly". We will have to wait and see. Naturally this influences mortgage rates and creates an uncertainty in borrowers considering if they should lock in now to a fixed rate product. We note that the majority of mortgages (over 70%) are now fixed rate and therefore are protected from current interest rate increases. However we also note that a large number of mortgages with fixed 2 year and 5 year periods will start to move to the standard variable rate and our analysis of high street bank mortgage pools suggest that this will occur between July and December of this year. If this is a concern, our independent mortgage specialists can be reached at privatefinance@maskells.com for their advice.
These rate increases have driven a slow down in national housing transactions and have impacted house price growth. That is understandable as many households are unable to afford any increase in mortgage payments. However, the whole country does not operate as a homogeneous housing market. For example in Prime Central London, foreign buyers, taking advantage of our currently weak currency are buying more and simplistically, interest rates are therefore not the sole driving factor in pricing in PCL. In fact, data from the London Datastore area profiles suggests that in the Royal Borough of Kensington and Chelsea only 14.3% of owner-occupied homes have a mortgage. The figure for Westminster is 12.3% and the figures for Hammersmith and Fulham is 19.5%. An interest rate increase will not impact many of the home owners in Prime Central London.
On a different note however, the Bank of England also produced weaker GDP growth estimates, expecting a shallow recession but output not returning to the pre-covid peak until 2026. In our Outlooks article sent a couple of days ago, we noted research that provided that firstly housing is a protector (from inflation) of capital values over a longer-period but real capital returns (housing net income and house price increases) are best served by an increase in GDP. If the Bank of England forecast is correct, then we must assume firstly that the house prices in Prime Central London will continue to rise, albeit more slowly and secondly that buy to let investors who are not mortgage driven will have an interesting opportunity to re-enter the market where rents are currently at a record high. In so doing they may well benefit from an increase in capital values as GDP improves. In any event, higher rents today, with currently slower house price growth do provide, in our opinion, an interesting total return for any property investor, albeit more income driven at this stage. As more investors enter the market then we naturally expect that rental stock will increase and consequently that rents will abate but the investor may then move to an equally attractive total return driven by the increase in the capital value of their properties.
As always, everyone’s circumstance is different and taking professional advice is essential.