Even before the cut, enquiries had gone up post-Brexit and vendors have been hiking property prices
Naomi Heaton
August 5, 2016: With interest rates being cut to a new historic low, the effect on the UK property market is expected to differ depending on location. Many borrowers may see the move as headline ‘good’ news. However, a response by the banks, similar to that seen during the Credit Crunch, could have a particularly negative impact on domestic borrowers in areas such as Greater London and the rest of the UK.
During the Global Financial Crisis, we saw banks widen their margins in the face of decreasing Bank of England base rates to maintain profits and build up capital reserves to hedge against any losses during a period of economic uncertainty. In recent years, we have seen those margins contract with the result that many homeowners and investors have been enjoying unprecedentedly low borrowing rates. However, we would expect to see banks reverting to their previous strategy, impacting affordability for new buyers or those looking to remortgage.
Another Brexit protectionist measure could be a withdrawal from the market of the highest loan to value products, as banks factor in a potential reduction in capital values across the domestic marketplace. This will inevitably further impact on retail lending and buyers’ ability to trade up, potentially restricting capital growth potential in the domestic market and becoming a self-fulfilling prophesy.
However, in Prime Central London (PCL), which is predominantly an international market where investors are not generally reliant on credit, the picture is different and the cut is unlikely to have any notable impact. Indeed, since the Brexit vote, we continue to receive investment mandates from clients who still see PCL as an investment location of choice and wish to take opportunistic advantage of the depreciation in sterling. This is evidenced by a 5-fold increase in enquiries in our latest property fund, London Central Apartments III. We anticipate that the rest of the year will continue to demonstrate positive uplifts for the PCL property market, under £1m.
Indeed, post-Brexit, vendors can be seen to be hiking prices. In January, one bedroom flats, which were being marketed at an average of £675,000, are now being marketed at £750,000, an 11% increase.
On the whole, the cut appears to be somewhat premature with most indices indicating business as usual since the vote and most economic statements being opinion based rather than fact based. It is also likely to send a negative message to the rest of the world.
There will be some clear winners from the move. For the time being, those already on tracker products will benefit but in areas such as Prime Central London, where investors are not highly mortgage dependent, the news will have relatively limited impact.
For most buyers, however, across the rest of the UK, the feel-good factor of a cut could very well be short-lived as banks move to protect their bottom lines and mortgage availability is once again restricted.
Naomi Heaton is CEO of London Central Portfolio