Rates hold steady but may rise soon
The monetary policy committee (MPC) of the Bank of England has held interest rates at 4.5 per cent for the 11th consecutive month. According to RICS (Royal Institution of Chartered Surveyors) this is a welcome if not unexpected decision.
‘The UK economy is performing significantly better today than at the turn of the year, due in part to robust activity conditions in Europe and Asia which has spurred a rise in manufacturing output and exports,’ says Milan Khatri, chief economist of RICS.
’The property market has shown some signs of cooling in recent months according to figures released by mortgage lenders, with Halifax reporting a 1.2 percent drop in prices for June. However, RICS estate agents are in a confident mood with new enquiries from would-be buyers rising throughout June despite the World Cup, and follows on from a strong rebound in market activity in May.’
RICS expects the Bank of England to follow the lead of other world central banks and raise interest rates later this year by a quarter percent point, says Khatri. ‘A modest rise in borrowing costs will not though depress the wider economy and we expect the housing market to retain an element of strength, with only a modest slowdown envisaged.’
House price rises ‘subdued’
House prices rose by just 0.3 per cent last month, according to the latest figures from Nationwide building society.
June’s figures mean there has been a three-month run of flat rises – evidence of what Nationwide refers to as a more subdued phase. Prices have risen by one per cent in the three months to the end of June, compared with 1.6 per cent to May and 2.1 per cent in the first three months of the year.
The average house price rose at a rate of £22 a day during the past year and now stands at £165,730.
Nationwide's group economist Fionnuala Earley pointed to the World Cup as a contributing factor in the relatively slow growth. But she said the lack of affordability was also important.
‘Mortgage payments for someone on average earnings now take up around 42 per cent of take-home pay compared with around 32 per cent three years ago,’ she said. ‘While earnings growth remains lower than house price growth, the ability to pay constraint will continue to bite.’
Rental yields ‘set to rocket’
Rental yields will rocket if interest rates rise, according to the Association of Residential Letting Agents (ARLA). ARLA’s latest data shows rents continued to rise in the south, and the asset value of property in London and the South East increased significantly in the second quarter of 2006. This points to healthy capital returns for existing landlords, it concludes.
Mark Alexander, managing director of The Money Centre, says, ‘The governor of the Bank of England has predicted a series of increases in interest rates, which I believe will result in property prices falling and rental yields rocketing.
‘If interest rates rise and property values fall, there are likely to be fewer new buy-to-let investors entering the market. It is new investors who sustain the supply of property to the rental market, so if new investor buying slows, or they withdraw from the market entirely, there will be an insufficient amount of new rental property on the market to satisfy tenant demand.’
However, he says, existing investors are likely to see this scenario as an opportunity to add to their portfolios, as they tend to have equity which means taking on new stock is less risky for them. ‘Most serious investors will have equity available to them through re-financing and, despite interest rates being higher, will continue to invest,’ says Alexander. ‘Cash is always king if property values fall and if they don't, then increased loans can easily be repaid.’