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UK Interest Rates Increase on Economic Growth

The Bank of England raised interest rates for the second time in under a year. What does this signal and how will it affect the UK housing market?

The Bank of England (BOE) has raised interest rates to 0.75%.

The hike was the second since the 2008 financial crisis. Last November it rose to 0.5% from 0.25%, the first time in almost a decade.

The BOE Monetary Policy Committee, which decides interest rates, voted unanimously for an increase in rates following positive economic growth and an encouraging labour market.

BOE Governor Mark Carney told reporters that economic growth rebounded in the second quarter, after a slight slowdown at the start of the year.

The bank’s forecasts show that consumer price rises could reach 2.2% in 2019 and 2.1% in 2020.

The BOE is likely to increase rates further if its forecasts prove right. Any future rise in rates, however, is likely to be at a gradual pace and to a limited extent.

This points to continued stability in the real estate market.

Andrew Burrell, JLL EMEA Head of Forecasting, says: “The (rate) rise has been largely priced in and is not expected to have major impact on real estate markets.” He observes that there will be more pressure on yields from market rates eventually.

Despite the rate hike, returns from real estate continue to remain attractive when compared to other asset classes.

Working in favour of the UK real estate market is the employment rate and stable consumer confidence, as well as the OECD predictions of global GDP growth at 3.8% for this year.

Sterling set to rise?

The falling pound dropped to its lowest level against the euro in nearly a year last week on 9 Aug, but edged higher against the Euro to 1.12 this week (as of 16 Aug).

Sterling's fall against the Euro and the Dollar (Source: BBC)
Sterling’s fall against the Euro and the Dollar (Source: BBC)

Stabilization of the pound could be due to the rate hike, which usually pushes up its value, and news reports detailing the potential for a concession being put on the table by the EU in the ongoing round of Brexit negotiations.

Some member states are reportedly ready to allow Britain to remain in the single market for goods while opting out of the free movement of persons. The trade-off is that the UK replicates all new EU environmental, social and customs rules in addition to those set out in Theresa May’s Chequers proposal.

This marks the first major divergence between the European Council, which is made up of leaders from member states and the European Commission. The concessions will be discussed at a meeting of leaders from both sides in Salzburg this September.

The currently weak pound provides foreign investors with a window of opportunity to buy into UK property and obtain good returns.

Jeremy Stretch, head of FX strategy at Canadian Imperial Bank of Commerce said the pound typically underperformed during the August holiday period. CIBC had tracked the pound’s performance on a monthly basis over the last 15 years.

Following this trend, foreign investors who are interested in UK property may want to consider entering the market now before the pound starts to rise again.

By Ian Choong
Edited by Vivienne Pal 



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UK Bank Raises Interest Rates

Experts and industry players are clear that the increase in interest rates will not have too adverse an effect on the property market. In fact, the UK’s property market will take the rise in its stride, according to ratings agency Moody’s.

The official bank rate in the UK has been lifted from 0.25% to 0.5%, the first increase since July 2007. The move reverses the cut in August of last year, which was made in the wake of the vote to leave the European Union.

Even with the increase, interest rates still remain at historic lows. To lend some perspective, Malaysia’s interest rates are at a high 3%, while the interest rates for Australia and Singapore are at 1.5% and 1.1%, respectively.

Higher interest rates increase the cost of borrowing money, which moderates economic growth and brings inflation under control.The panel which sets interest rates, called the Monetary Policy Committee (MPC), has justified the rate increase by pointing to record-low unemployment, rising inflation and stronger global economic growth.


In contract, Malaysia's interest rates are at a far higher 3% compared to UK's 0.5%. Image credit: Trading Economics
In contract, Malaysia’s interest rates are at a far higher 3% compared to UK’s 0.5%. Image credit: Trading Economics

Bank of England governor Mark Carney stated that the UK economy is expected to grow at about 1.7% for the next few years. He said this would require “about two more interest rate increases over the next three years”, taking the official rate to 1%.

The Bank of England (BOE) has been reluctant to raise interest rates until now, arguing that inflation had been boosted by the fall in the value of the pound since the Brexit vote in June of last year. OBR predicts inflation will peak at 3% this quarter before falling back towards its 2% target over the next year.

Expectedly, the increase in interest rates will cause knock-on effects in the UK property market. Homeowners on variable rate mortgages, whether it is a standard variable rate or a tracker rate, will be most affected. However, homeowners whose mortgages are on a fixed rate will not be affected by the rate hike until  they remortgage their property.

Higher mortgage payments caused by rising rates can put less households in reach of a mortgage (loan). The lower competition can reduce demand for property which will in turn slow down property price growth. Correspondingly, the market for rental properties will increase as people who might have bought a house can now only afford to rent. This, from the investor perspective, is a good thing.

Experts and industry players are clear that the increase in interest rates will not have too adverse an effect on the property market. In fact, the UK’s property market will take the rise in its stride, according to ratings agency Moody’s.

Moody’s economist Colin Ellis said, “We have expected a rate rise for some time. This is about taking away emergency stimulus introduced after the referendum vote. A rise of 25 basis points [0.25%] is not going to move the dial. A rise of 0.25% pales into insignificance compared to the 8%-10% decline in the currency.”

Surveys from major mortgage lenders Halifax and Nationwide have painted a buoyant picture of the housing market. Halifax reported that house prices in the UK were rising at their fastest annual pace since February, up 4.5% to a record £225,826. Nationwide’s house price index also showed prices picking up in October, to an annual rate of 2.5%, the highest reading recorded in three months.

Savills predicts the housing market will grow by 14% from 2018 to 2022 based on an assumed Bank base rate of 2.25% by 2022. The north-west of England is set to experience the fastest price growth in the UK over the next five years: a surge of 18.1%.

Savills also forecast that rents are set to grow faster than house prices in London for the first time since 2011. They are forecast to rise 17% over the next five years, despite a 3% fall this year.

Virata Thaivasigamony of property consultancy CSI Prope commented, “The interest rates are now still very low, so it’s a good time to get into property. The fact that the UK is increasing interest rates at this time is a great statement of confidence in its economy, that Brexit is no longer a cause for concern.

“The UK has had a housing crisis over the past few years, and the increase in interest rates isn’t going to change the basic fact that people still need homes — which are a basic necessity. If people can’t afford to mortgage, they will have to rent. You’ll see rental income potentially going up, as demand for housing continues its upward trend.”

Interest rates remaining near historic lows bodes well for buyers, and today’s market still reflects some of the cheapest debt a property buyer will be able to attain in the market.

Article by Ian Choong

CSI Prop proudly promotes international investment property with high yields at low risk. Our portfolio comprises residential property in cities across the United Kingdom (London, Luton, Manchester, Liverpool, Newcastle, York, Glasgow, Scotland; Sheffield, etc); Australia (Melbourne, Perth, Brisbane) and Thailand (Bangkok). Our projects are concentrated in high-growth areas with great educational, infrastructural and job growth potentials. We aspire to make a difference in the lives of our clients by helping them achieve their investment goals through strong market research backed by third party experts. 

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