Stephen Moss is CEO of investment property search engine Pring.co.uk. Here, he discusses the consequences of impending interest rate rises on the buy-to-let sector.
A matter of interest
Several of the political/economic commentators who make a career out of following the Bank of England’s activities have drawn our attention to the current interest rate situation. The record low 0.50 per cent base rate, which has prevailed for over six years (since May 5th 2009, in fact) cannot possibly be maintained. They all agree.
Base rate rises are inevitable, it seems. Even the brilliant and composed BoE Governor, Mark Carney, has hinted that we should brace ourselves for increases in the not too distant future. The low cost of borrowing cannot be sustained in an economy that has returned to growth in a low inflation climate.
We need higher rates to stimulate saving, encourage investment and address the stark decline in the performance of pension funds. No doubt true.
Of course, there is a generation of people, especially younger or more recent entrants to the buy-to-let market, who have never known anything but the miniscule 0.50 per cent base rate in recent times. Their whole approach to the financial equation is based on it.
Once upon a time….
Taking a backward glance at some interesting periods in the past, when the base rate was somewhat more volatile. The spell from 15th November 1979 to July 1980, brings the whole subject into focus. During that time, the base rate was an incredible 17 per cent.
Another interesting period was the three-or-so years between July 1988 and September 1991, when the base rate was in double digits throughout.
It wasn’t until the nine years from 1992 to 2001 that the base rate managed to hover comfortably around the 5 per cent, 6 per cent and 7 per cent mark.
It’s safe to say that we have been living in abnormal times since the banking collapse.
The experts have also predicted that fairly modest rises in base rate to, say 4 – 5 per cent, would have a serious impact on some one million variable rate homebuyers who have managed to get onto the buying ladder while interest rates are so low – but will struggle or be unable to keep up higher mortgage repayments. They will find themselves in a difficult position, possibly facing repossessions, downsizing as their families are growing or worse, homelessness and insolvency. With stamp duty, legal fees and all the other attendant charges, a high proportion of these struggling ‘marginal’ home owner-occupiers will find it difficult to trade down and are thus likely to enter the a rental market, which is already operating at full capacity.
What is not difficult to see is a huge rise in demand for rented housing, throughout the country, pushing up rental prices, combined with reluctance from the buy-to-let sector to expand their portfolios in the face of ever-higher borrowing rates.
Somewhere in the middle of these conflicting market forces there will come a point at which landlords will invest in buy-to-let again, buoyed by the prospects of improved rental returns but it’s hard to predict exactly when this point will be reached.
From the viewpoint of this sector, the more gradual the base rate increases, the better. For it to absorb anything like a million new dispossessed tenant families and individuals, huge numbers of the modestly priced homes that will have become unaffordable to their current mortgagees will have to be acquired by private landlords, who in turn, will be finding funds more expensive to access.
Simply cranking up interest rates, as a mechanism for bringing some balance to a recovering economy, is not an option as this would prevent vital investment in buy-to-let property.
The new-build sector is gradually getting back into its stride but the current demand rate of 250,000 new homes a year will neither be met, nor sustained, if people on static, or effectively shrinking incomes, can’t afford mortgages to buy the ones that are being built. Shortage of residential accommodation will remain a major challenge.
Before too long, the days of the 0.5 per cent base rate could be just another distant memory. However, it is vital that changes to the rate are as slow and incremental as possible. This will give the established rental housing market time to adjust to a new order.
The Government must think about how to alleviate the rental sector’s concerns and stimulate growth to create a large increase in residential rental capacity. Commensurate tax breaks for independent private landlords might be a good place to start.
Stephen Moss is CEO of Pring.co.uk which allows investors to search for investment properties that match their precise criteria, saving hours in research time. The site has more than 300,000 properties and gives each a unique investabilitiy score.