The Bank of England’s August interest-rate hike didn’t just take the City by surprise. Property pundits and estate agents were left choking on their lattes as rates rose for the first time in two years to 4.75%. Comments from David Newnes of Your Move were typical of the indignant response: “First-time buyers have been struggling to get on the property ladder… The 0.25% increase will put some potential buyers off making their purchasing decision – not just because of this rise, which in real terms is quite
small – but because any rate rise knocks confidence.”
Interest rates and first-time buyers: house prices could fall
The concern for first-time buyers is touching, but entirely misplaced.
Of course the rate rise is not good news for those who have just stepped onto the property ladder. But for those who have yet to make a purchase, it’s very good news indeed. Not only will their hard-saved deposits earn more money while sitting in the bank, but it’s more than likely that the rate hike will put a stop to the much-discussed ‘mini-boom’ that has seen house prices move back onto the upward path this year after spending most of 2005 in the doldrums.
Higher rates make it less attractive for buy-to-let investors to add to their property portfolios. Buy-to-let has been a key driver of the market in recent years, but the yield on rental property is already as low as 0.7%, according to the Association of Residential Landlords. When you consider that savers can now get gross interest rates of more than 5% simply by putting their money in the bank, it seems madness to invest in a risky, labour-intensive proposition such as rental property for a lower return.
Interest rates and first-time buyers: a crash could be on the way
As Antonia Senior in the The Times puts it: “Even the hottest house-price run will slow down if no new blood comes into the market, especially if rates rise even higher. A slowdown will mean more reasonable prices – music to the ears of frustrated buyers.” But given the rapid rise in debt problems over the past year (in the first half of 2006 the number of home repossessions nearly doubled to more than 8,000), a mere slowdown may prove to be wishful thinking. Peter O’Donovan of Bestinvest said: “Repossessions have been soaring during a period of flat interest rates, so [the latest] rise might prove to be the straw that breaks the camel’s back.” We have a feeling that’s what estate agents are really worrying about when they berate the Bank for raising interest rates.