Rise in base rate could drive more landlords to sell up - DavidAlexander
When, next month, my thoughts go back 40 years to when I started my business, they are likely to bring about a sense of déjà vu.
At that time inflation was running at around 12 per cent, which is just short of the 13pc forecast by the Bank of England will be reached by the end of the current year; and both the government and private sector employers were facing demands for substantial pay rises, backed up by strikes and the threat of them.
But there are also two big differences between then and now. Firstly, bank base rate stood at 10pc, which of course is almost six times as much as the new rate of 1.75pc announced by the BoE Governor, last week. Secondly, the average price of a house in the UK was just under £25,000, which adjusted for inflation amounts to around £82,000 today, whereas, according to figures just released by the Halifax, the average price last month stood at £273,000.
Given that economics is an art form rather than an exact science, let me draw my own conclusions, the main one being that ultra-low interest rates since 2009, and in particular the period from 2017 to the beginning of 2022 during which they fell to as low as 0.10pc, have been largely responsible for a level of inflation in house prices few would have thought possible, especially since much of the past two years have seen a massive stalling in economic activity due to a deadly pandemic.
So will last week’s rise in base rate from 1.25pc to 1.75pc at last manage to put the brakes on this runaway train?
In one respect tens of thousands of owner-occupiers will not be adversely affected in the short- to medium-term as they will have already agreed fixed rate mortgages. Those who managed to secure such a deal just before last week’s base rate rise will, understandably, be feeling pretty pleased with themselves. The downside is that when the fixed term comes to an end, interest rates will almost certainly be even higher than they are now so the inevitable jump in monthly outlays – whether on a new fixed rate or an SVR (standard variable rate) – is likely to be substantially more than it would be just now.
Therefore every mortgaged homeowner is likely to be on the receiving end, either sooner or later but whether or not this is this likely to disrupt their ability to maintain payments is not so clear.
Presuming that households will have to cut back, to some extent, I would expect this to come in the form of reductions in the use of credit cards for clothing, eating out and holidays, which would also have the added benefit of reducing their interest payments (no bad thing, perhaps – Great Britain has by far the worst record for consumer debt in Europe). I believe most folks would take that course of action before trying to reduce their housing costs by downsizing or moving to a lower-value area. This is particularly true of first-time buyers, having sacrificed so much to secure the keys to the first home of their own.
Unlike the previous property slump (a consequence of the banking crisis of 2008/9), there is less likelihood of mortgagees finding themselves in negative equity, due to banks and building societies offering loans of 100pc (or more) of a property’s value. This was followed by a lower LTV (loan to value) policy, which means that should values fall back (unlikely in a hotspot like Edinburgh but possible in some of our less fortunate post-industrial towns) more people will have the benefit of retaining equity in their properties which should help them survive any forthcoming financial storm.
The rise in base rate could, however, drive more landlords to sell up. Their profits – both actual and pro rata – have tumbled in recent years due to a tax squeeze, ironically by a Conservative government, and higher mortgage payments may be the last straw. Indeed, were it not for the seemingly unstoppable rise in capital values over the past couple of years, many more may have already called it a day.
On paper, less activity from landlords should be good for owner-occupiers by reducing the “competition” when it comes to bidding for homes but there could be a sting in the tail. During a period of economic turbulence, the last thing the country will need is a drop in the availability of affordable rented homes.
David Alexander is chief executive officer of DJ Alexander
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