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Base rate cut good news for the property market

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Thu 01 Sep 2016

Base rate cut good news for the property market

As widely predicted by economists, the Bank of England cut the base rate in August for the first time in seven years, bringing it to a record low of 0.25 per cent.

The Bank's Monetary Policy Committee has responded to mounting pressure to act following poor economic data since the EU referendum.

In addition to the base rate cut, the Bank has authorised a further £60bn of government bond (Gilt) purchases, £10bn in corporate bond purchases and a new scheme to ease the funding costs of banks, potentially worth up to £100bn. Its aim is to offset the negative impact of the cut in the base rate on lenders’ profit margins and alleviate the risk of a reduction in lending to households and businesses.

While the effect of the cut on mortgage rates remains to be seen, it is likely to generate an increased level of confidence among sellers and buyers.

We believe this is good news for the property market as it will increase buyer affordability and help first-time buyers and those wanting to move up the housing ladder. The opportunity to secure a very low fixed-rate mortgage and be certain of mortgage outgoings for some time will give buyers greater stability and confidence and thereby stimulate demand.

The reduced base rate can also be taken as good news for the buy-to-let market. Investors are likely to be attracted by low interest rates and borrowing costs, making buy-to-let a more appealing option than savings and other forms of investment.

Rental yields of between four and five per cent are typical for a good investment property, which in addition to excellent long-term capital growth prospects make bricks and mortar the most enticing investment on the market.

The minutes of August’s Monetary Policy Committee meeting strongly suggest interest rates could be cut further if the economy continues to weaken.

We anticipate that strong ongoing demand will underpin house prices and the market will remain resilient as the UK navigates its way through Brexit.