New property listings
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New property listings down 6% in June

New property listings fell by 6% across the country from June to July, as Brits made the most of the hot weather and held off marketing their homes, online estate agents HouseSimple.com has found.

This was even more pronounced in London, where new listings fell by 12.7%.

Sam Mitchell, chief executive of HouseSimple.com, said: “The summer months tend to see a drop off in buyer and seller activity as families head overseas on their holidays.

“This year, more families chose to stay at home and we might have expected to see a mini boost in supply as a result. However, no-one predicted we’d have such a glorious July, and it’s hardly surprising people headed to the beach rather than the estate agent.

“There’s no evidence to suggest that buyers and sellers are withdrawing, and even yesterday’s rate rise, is unlikely to have a dramatic impact on the market.

“We may well see subdued seller activity in August as more hot weather is predicted, and then the hope is for a strong September as we enter the crucial Autumn period up to Christmas.

“However, for sellers who might want to steal a march on the competition, putting your property on in August when stock levels are lower could pay dividends, as buyers will have less choice over the next few weeks.”

The number of new homeowners listing their properties fell below 67,000 in July, after surpassing 70,000 in June. In London, July was the first monthly dip in new supply since December 2017.

July and August are traditionally quieter months both for buyers viewing properties and sellers listing homes but in more than half (55.7%) of the towns and cities analysed, new stock levels were up in July compared to June.

As for specific towns, Blackburn in the North West, saw the largest drop off in supply last month, with new listings down almost half (48.6%) on June. While, new supply in Poole was up 42.8% in July.

After new supply levels in London reached a three-year high last month, July listings fell significantly, with new listings down 12.7% versus June, and every borough except Newham seeing stock levels fall.

Camden saw almost a third fewer new homeowners listing their properties in July compared to the previous month.

The Royal Borough of Kensington and Chelsea, and the borough of Hackney, saw new property listings fall 26.1% and 24.1% respectively from June to July. Newham (11.9%) was the only London borough to register an increase in supply.

Source: Mortgage Introducer

base rate
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The base rate rise won’t have an immediate effect on rates

The Bank of England’s decision to raise the base rate from 0.5% to 0.75% won’t have an immediate effect on mortgage rates, lenders argued.

The Monetary Policy Committee’s unanimous vote meant that this is the highest the rate has been for nine years.

Paul Broadhead, head of mortgage and housing policy at the BSA,said: “The majority of mortgage borrowers will see no immediate impact on their household finances as two-thirds of existing mortgages are on fixed rates.

“Transaction levels amongst home-movers are already subdued, partly because of Brexit related uncertainty.  How much rates will move in such a highly competitive market remains to be seen.

“Lenders will need to balance the interests of savers and mortgage borrowers when making rate setting decisions.”

Jackie Bennett, director of mortgages at UK Finance, agreed, citing that most new loans are fixed.

She said: “The majority of borrowers will be protected from any immediate effect from today’s increase, with 95% of new loans now on fixed rates and almost two-thirds of first-time buyers opting for two-year fixed rate products over the last 12 months.

“There is no single indicator of the cost of funds to lenders. Lenders have individual funding models, with the cost and mix of funding sources varying considerably from lender to lender.

“As a result, when costing their Standard Variable Rate (SVR) or reversion rates, lenders are not necessarily led by the Bank of England Base Rate so any increase or decrease in the Rate may not be passed on to borrowers.

“Rates are still at an historic low and borrowers remain well-placed to get a good deal from the UK’s competitive mortgage market.”

However David Whittaker, chief executive of Keystone Property Finance and buy-to-let mortgage broker Mortgages for Business, said that it won’t be long until lenders have to look at their pricing with shorter terms likely to come first.

He said: “It won’t take lenders long to nail their colours to the mast and adjust their pricing, particularly those who have spent the last year absorbing costs instead of passing them onto borrowers.  Shorterterm fixed rates are likely to be the first to be punished.

“We may even see lenders hold off a little longer before adjusting five year fixed products.  But mortgage rates will be going up sooner rather than later.  Borrowers will have to expend a bit more blood, sweat and tears reworking their sums and cash flow projections.”

David Hollingworth, associate director, communications, L&C Mortgages, said that despite many borrowers looking ahead and getting a fixed rate, those that haven’t yet may now be finally be triggered to revisit their situation.

He said: “Although rates have been drifting upwards since the run up to the last rate hike, the fixed rate options are still very competitive. Those most vulnerable to rising rates will be borrowers on their lender’s standard variable rate.

“An increase of 0.25% for a £200,000 25 year repayment mortgage could increase monthly payments by around £25 or more.

“Reviewing their rate could offer them substantial cost savings as well as being able to lock their rate down and protect any further rate rises. Assuming that lenders apply any increase to their SVR, average SVR rates could be around 5%, although the range of SVR varies widely between lenders.”

Gemma Harle, managing director of Intrinsic mortgage network said the decision was no surprise because of the speculation that was rife in the market.

She said: “Due to this, many lenders will have already factored into their pricing this hike in interest rates.

“Today’s announcement represents only the second time there has been an interest rate rise in a decade which means many people are in for a shock as they will have not experienced such an increase and will therefore need to adjust their current spending to accommodate this rise.

“The knock on impact of this, is that it may make people’s mortgages become unaffordable. This will be especially true for mortgages that were taken out prior to the 2014 introduction of stress testing at the application stage.

“Those customers whose current fixed rate is coming to an end and were expecting to get a cheaper or the same fixed rate may also be disappointed.”

Source: Mortgage Introducer

Rate rise
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Rate rise likely to have minimal impact on housing market, say agents

Rate rise should have little effect on the property market or buyers’ intentions, according to most – although not all – agents. Some lenders have already raised their fixed and tracker rates with others likely to do so on Monday.

Paul Smith, CEO of Spicerhaart, said of the rate hike: “It will have minimal impact – 0.75% remains a historically very low base rate and this small increase is unlikely to affect the majority of borrowers.

“It is even more unlikely to make buyers think twice about buying property, given the cost of renting and the UK’s commitment to investing in bricks and mortar.”

Guy Gittins, managing director of Chestertons, said that the impact would be “modest” and unlikely to alter anyone’s decision to buy.

He said that it might instead inject a little more urgency into moving so that buyers could secure a mortgage “while lending remains at incredibly cheap rates”.

Rob Clifford, group commercial director at SDL, which operates lettings, property management and mortgages businesses, said: The cost of borrowing remains exceedingly low and is still amongst the cheapest since records began.

“Hopefully, industry commentary can now switch to the real barriers that are currently impeding a free-flowing housing market – and that is supply and demand and the level of initial deposit required.”

Ishaan Malhi, CEO of online mortgage broker Trussle, said that owners on variable rate deals should switch if they could.

He said that the average home owner on a variable rate with £200,000 to pay off on their mortgage would see repayments rise by £300 over the course of a year.

Russell Quirk of Emoov was among those agents sounding a worried note, saying: “Mark Carney really is pulling the rug from beneath the nation’s aspiring and existing home owners. The Government’s failure to build any meaningful level of housing stock is pushing prices ever higher and now the Bank of England has hit them with an increase in interest rates that will see mortgage payments increase, while resulting in a pitiful return on their savings.

“Although today’s hike will be digestible for many, it should act as a warning shot for UK home buyers and home owners. Yes, the cost of borrowing remains low, but interest rates are now at their highest in a decade and could continue to snowball, putting many in a perilous position when they come to buy or remortgage.

“Those looking to buy should be strongly advised against the temptation of borrowing beyond their means, as well as the importance of securing a fixed rate mortgage.”

Source: Property Industry Eye

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Bank of England hikes rates for the 2nd time since the financial crisis

  • The Bank of England increased interest rates for just the second time since the financial crisis on Thursday.
  • Britain’s central bank raised its benchmark interest rate to 0.75% from 0.5%.
  • Members of the rate-setting Monetary Policy Committee voted unanimously to raise rates.

The Bank of England raised interest rates for just the second time since the financial crisis on Thursday, in a move widely expected by commentators and market participants alike.

Britain’s central bank raised its base rate of interest from 0.5% to 0.75%, its second hike in less than a year as it continues the process of slowly normalizing monetary policy following more than a decade of unprecedented stimulus. The bank’s key rate now stands at its highest level since March 2009.

The nine members of the rate-setting Monetary Policy Committee voted unanimously to raise rates.

“Today, employment is at a record high, there is very limited spare capacity, real wages are picking up and external price pressures are declining,” the Bank of England’s Governor, Mark Carney, said at a press conference after the announcement.

“With domestically generated inflation building and the prospect of excess demand emerging, a modest tightening of monetary policy is now appropriate to return inflation to the 2% target and keep it there.”

Prior to the announcement, markets were pricing in a more than 90% chance of a hike, with Carney and the other eight members of the MPC signaling for several months that a hike was likely to come at its August meeting.

The pound jumped on the announcement, before falling sharply after Governor Mark Carney began to speak to reporters. By 12.55 p.m. BST (7.55 a.m. ET) it was close to 0.7% lower against the dollar.

Within the announcement, the Bank of England made clear that it stands ready to continue the normalization of monetary policy.

“The Committee judged that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon,” the BOE said.

Reaction to the hike was mixed, with some analysts questioning the expediency of the bank raising rates less than a year before the potential hit to the economy that Brexit may bring.

“At first glance, raising rates now looks something of a strange decision,” Ben Brettell, senior economist at FTSE 100 investment manager Hargreaves Lansdown said in an email.

“Inflation is above the 2% target, but not disastrously so. And a large chunk of the inflation we’re seeing is down to higher oil prices – something beyond the Bank of England’s control. Wage growth is relatively subdued, and the economy isn’t exactly overheating at the moment,” he added.

Source: Business Insider UK

house price
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House price growth up 2.5%

There was a modest rebound in annual house price growth in July, up 2.5% year-on-year while prices role 0.6% month-on-month, the Nationwide House Price House has found.

Nonetheless, annual house price growth remains within the fairly narrow range of c2-3% which has prevailed over the past 12 months, suggesting little change in the balance between demand and supply in the market.

Jeremy Leaf, north London estate agent and a former RICS residential chairman, said: ‘The slow growth in prices, which we have seen over the past few months, is continuing.

David Torpey to step down from MD of Bluestone Mortgages

“Supply and demand remain broadly in line and the shortage of stock, as well as low interest and jobless rates, prevent a larger fall.

“This balance is likely to be disturbed by even a modest increase in mortgage rates, even though relatively few borrowers will be affected by the change as they are on fixed-rate mortgages.

“But the direction of travel always seems to have an adverse impact on confidence and is likely to reduce low levels of transactions even further.”

Robert Gardner, Nationwide’s chief economist, added: “Looking further ahead, much will depend on how broader economic conditions evolve, especially in the labour market, but also with respect to interest rates.

“Subdued economic activity and ongoing pressure on household budgets is likely to continue to exert a modest drag on housing market activity and house price growth this year, though borrowing costs are likely to remain low.

“Overall, we continue to expect house prices to rise by around 1% over the course of 2018.”

Steve Seal, director of sales and marketing, Bluestone Mortgages, thought the rise was relatively modest and highlighted that the self-employed and contractors still need help getting ont o the housing ladder.

He said: “Although house price inflation has creeped up, when we compare these numbers to a few years ago with near-double digits, this rise is still relatively modest.

“However, this doesn’t mean all borrowers have an equal chance of stepping onto the property ladder. Self-employed workers, contractors and freelancers usually struggle to secure lending due to their complex income streams being incorrectly labelled ‘high-risk’.

“The UK workforce is changing, and it is unfair that these groups of borrowers are not given the same opportunities as others.”

Gardner predicted an interest rate rise of 0.25% which he said would have a modest impact

He said: “It is looking increasing likely that the Bank of England’s Monetary Policy Committee (MPC) will increase rates at their next meeting on 2nd August.

“Providing the economy does not weaken further, the impact of a further small rise in interest rates on UK households is likely to be modest. This is partly because only a relatively small proportion of borrowers will be directly impacted by the change.

“Moreover, a 0.25% increase in rates is likely to have a modest impact on most borrowers who are on variable rates. For example, on the average mortgage, an interest rate increase of 0.25% would increase monthly payments by £16 to £700 (equivalent to £190 extra per year).

“The MPC has also continued to signal that it expects any increases in interest rates to be gradual and limited. Financial market pricing suggests that Bank Rate is only likely to rise to around 1.25% over the next five years.

“And, for those, some of whom will be on variable rates, any rate rise will be a struggle, even though the impact on the wider economy and most households is likely to be modest.”

Russell Quirk, founder and chief executive at Emoov, Quirk, added: “While even the predicted increase to 0.75% will see mortgage availability remain very affordable for many, it will have implications for those borrowed up to the teeth, or considering it, in order to get a foot on the ladder.

“That said, in many areas, asking prices are continuing to realign themselves with wider market conditions and so a marginal increase in the cost of borrowing shouldn’t deter those in the appropriate position to buy.”

Source: Mortgage Introducer

house prices
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UK house prices pick up a little speed in July – Nationwide

British house prices gained a bit of momentum in July after rising at their slowest annual rate in five years in June, mortgage lender Nationwide said on Wednesday.

House prices rose by an average 2.5 percent from July last year, faster than growth of 2.0 percent in June and above a forecast for a 1.9 percent rise in a Reuters poll of economists.

In monthly terms, prices rose by 0.6 percent in July from June, faster than the Reuters poll forecast of 0.2 percent.

Nationwide said the annual increase remained in the narrow 2-3 percent range of the past 12 months and the lender still expected prices to rise by only 1 percent in 2018.

Britain’s housing market has slowed since the 2016 referendum decision to take the country out of the European Union. Eight months before Brexit is due to happen, Prime Minister Theresa May has still to agree with the EU about Britain’s future trading relationship with the bloc.

Nationwide economist Robert Gardner said an expected interest rate hike by the Bank of England on Thursday was likely to have only a modest impact on the housing market because most mortgages issued in recent years were on fixed interest rates.

However, around 12 percent of homeowners already spend over 30 percent of their gross income on their mortgage and “for those, some of whom will be on variable rates, any rate rise will be a struggle, even though the impact on the wider economy and most households is likely to be modest,” Gardner said.

Source: UK Reuters

UK economy
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A ‘no deal’ Brexit would cost UK economy dear, warns think tank

A “no deal” Brexit scenario would cost the UK economy at least around £800 per person in lost output each year, a think-tank has warned.

The National Institute of Economic and Social Research (Niesr) also estimates the cost to the economy of the UK crashing out of the EU could double the lost output if the impact on productivity is also taken into account.

It said the Bank of England will likely “weigh the consequences of ‘getting it wrong’” ahead of Thursday’s vote on whether to raise interest rates to the highest level for more than nine years amid uncertainty over a Brexit deal.

In our view, the Government will have to make significant concessions to the EU.

Niesr

Niesr predicts a hefty blow to the economy if the Government’s “more restrictive” White Paper proposals on Brexit are achieved – amounting to £500 per person in lost output per year over time, compared with the soft Brexit scenario.

But it said this would rise to £800 per person in the event of a “no deal” Brexit.

“These estimates do not include the likely impact on productivity which could, on some estimates, double the size of the losses,” it said.

In its latest set of predictions for the economy, Niesr said the Bank of England should only raise rates gradually and “stand ready to move in either direction should circumstances change”.

“The committee should emphasise the uncertainty (rather than the certainty) of its future policy stance in its communications and its willingness to reverse its decisions,” according to Niesr.

It is forecasting UK growth of 1.4% this year and 1.7% next year – broadly in line with its previous forecasts.

The predictions assume a “soft Brexit” scenario – where the UK achieves close to full access to the EU market for goods and services – and an increase in rates from 0.5% to 0.75% on Thursday decision, with rates hitting 1.25% in 2019.

Though it stressed the risks are heavily skewed to the downside.

Niesr said: “The UK economy is facing an unusual level of uncertainty because of Brexit.”

“The UK government’s White Paper, which set out its preferences for that new relationship, has failed to unite the Government or Parliament, leaving open an entire spectrum of possible outcomes,” it added.

Niesr also warned the Government would have to make “significant concessions” to the EU for its White Paper proposals put forward last month to succeed.

On spending, it said pressure to increase funding for the NHS and public sector workers will fail to see government spending as a share of GDP fall, in contrast to forecasts by the Office for Budget Responsibility (OBR).

The Budget deficit will therefore remain close to 2% of GDP over the next five years instead of the OBR’s forecast of 1%, according to Niesr.

Source: BT.com

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New rules for peer-to-peer lending announced by FCA

The popularity of peer-to-peer (P2P) lending has increased exponentially in recent years, with nearly £10 billion being transferred through such platforms in the past ten years. In an attempt to fix “increasingly complex business structures”, the FCA has announced new plans for new rules for peer-to-peer (P2P) lending.

The FCA has announced new plans which will see a crackdown on P2P lending and the loan-based crowdfunding industry in general following concerns that consumers are at risk of investing in things they do not understand.

P2P lending was last reviewed by the FCA in December 2016, announcing at the time, its plans to address the gap in protections for customers. Since then it has monitored the situation and noted the variety of loan-based crowdfunding business models, of which some are becoming increasingly complex. Whilst the FCA regulates loan-based crowdfunding (also known as P2P lending) and investment-based crowdfunding (which falls outside of the FCA’s present review), the FCA does not regulate donation-based or reward-based crowdfunding (hence, both of these fall outside of the FCA’s review).

As part of its ongoing monitoring, the FCA has also noted poor practice among some firms in the crowdfunding industry. The proposals detailed below aim to improve standards in the sector whilst still leaving scope for further innovation.

The consultation is aimed at establishing views on the following proposals:

  • Proposals to ensure investors receive clear and accurate information about a potential investment and understand the risks involved
  • Ensure investors are adequately remunerated for the risk they are taking
  • Transparent and robust systems for assessing the risk, value and price of loans, and fair/transparent charges to investors
  • Promote good governance and orderly business practices
  • Proposals to extend existing marketing restrictions for investment-based crowdfunding platforms to loan-based platforms

Executive director of strategy and competition for the FCA, Christopher Woolard has stated that: “The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up to date as markets develop.”

Equally, the FCA was keen to ensure that not all P2P lenders were criticised, noting that some “P2P platforms already have more robust systems and controls in place”.

The new proposals will also see tighter provisions when alternative funding is used for home loans. The FCA will seek to enforce its Mortgage and Home Finance: Conduct of Business rules on P2P platforms if they begin to deal in the residential lending market.

The FCA is asking for responses to the consultation by 27 October 2018 before it publishes rules in a Policy Statement later this year.

Source: Lexology

pensions
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Tax changes could see landlords place £28bn into pensions

The gradual decrease of mortgage interest tax relief could drive out ‘amateur’ landlords from the property market and place £28bn into personal pensions, a provider has said.

One in five buy-to-let landlords are planning to sell up in the next five years due to policies impacting their profitability, such as the 3 per cent increase in stamp duty on second homes brought in in April 2016, and a phasing down of mortgage interest tax relief to 20 per cent, according Aegon.

This could lead to landlords beginning to re-think their investment strategy, the provider said.

According to Aegon, the average property price sits at £225,000, meaning if a landlord releases one quarter of this upon selling the property, they could pay £56,250 into a personal pension net of tax. For higher taxpayers, this turns into £93,750 after claiming tax relief.

While there is a cap of £40,000 on how much can be paid into a pension each year tax free, those who have not used their allowance in the previous three years can catch up, meaning they can pay in up to £160,000, including tax relief.

Multiplying the £56,250 figure by the estimated 500,000 investors planning on selling equates to £28.1bn.

Steven Cameron, pensions director at Aegon, said: “The landscape for landlords has changed significantly in the last two years.

“Having a buy to let property has been seen by some investors as an alternative to saving in a pension. Investors turned to the property market in a bid to secure better returns as property values rose considerably, albeit with significant geographical variations.

“However, tax and regulatory changes and the prospect of rising interest rates is prompting 1 in 5 to consider selling.”

He said those holding property to fund their retirement in the first place may wish to put the money in a pension instead.

But Alistair Wilson, head of retail platform strategy at Zurich, said landlords should be wary of breaching their annual allowance limit, currently set at £40,000.

He said: “For many landlords, using the proceeds from a property sale to boost their pension is likely to make good financial sense, especially as they get a 20 per cent bonus in tax relief from the government.

“However, they should be wary of exceeding their annual allowance, or they will lose this top-up.”

Mr Wilson said one of the winners of any trend from property to pensions was likely to be investment platforms, which would see a boost in inflows as more and more people invest their pensions via platforms.

“We may also see a boost in demand for property funds, as investors seek a similar replacement for their bricks and mortar investment,” he added.

Phil Smith, director and group chief executive of provider Embark Group, said any tax policy influencing net yields could be expected to impact investor actions greatly.

He said: “Buy to let property investors have been progressively and negatively impacted in recent years, and it is only the low cost of debt that has kept them in the game.

“As debt costs rise, switching accumulated equity into pension contributions, taking eligible tax relief at source, and then investing into non-residential property is now exceptionally attractive when comparing like to like.

“We are seeing this in our pension books and have continued to build an sizeable property capability as a result.”

Source: FT Adviser

House prices
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House prices aren’t just slipping in the UK – this is global

It’s very easy to become parochial when it comes to thinking about property markets.

We focus on the slowdown in the UK market and we ponder what’s causing it. Could it be new rules on landlords? Could it be the crackdown on overseas investors? Could it be Brexit?

But this really is less than half the picture.

Because the residential property slowdown isn’t just happening in the UK – it’s happening pretty much everywhere.

Why residential property matters

We talk about property a fair bit in Money Morning. There are a few reasons for that. Firstly, everyone’s obsessed with it. So it’s fair game as a topic.

Secondly, it’s an important asset class. Stockmarket crashes grab headlines, but the truth is the market can slide hard without ever really scratching the sides of the economy. But if the housing market crashes, you tend to know about it, because typically there’s a lot of debt involved.

Thirdly, it’s usually a pretty big item on the household balance sheet. I think it’s fair to say that the majority of us aspire to owning a home and clearing the mortgage. And those who already have might be keen to use it to fund other things – retirement, deposits for offspring, or even an inheritance (although my advice on this latter point is spend the lot, your kids want you to have fun – and if they don’t, they don’t deserve it anyway).

Anyway – so that’s why we go on about property. But as I said in the intro, it’s easy to get a bit too fixated with what’s going on locally. That can lead you to the wrong conclusions. After all, there are a lot of legislative changes that are affecting the UK housing market right now, for example.

But it’s not just the UK. House prices are hitting a wall almost everywhere.

Take Australia. The land down under has long had one of the most expensive property markets in the world. It barely winced during the 2008 financial crisis, despite carnage everywhere else.

And yet now, it finally appears to be losing steam. Prices in Sydney fell by 4.5% in the second quarter, while prices in Melbourne slipped too.

Australia is far from alone. Hot global markets everywhere are slowing down. Canada is another good example.

And now we’re seeing it happen in the US as well. As Bloomberg reports: “The US housing market – particularly in cutthroat areas like Seattle, Silicon Valley and Austin, Texas – appears to be headed for the broadest slowdown in years.”

The number of home sales (of existing homes as opposed to new builds) fell in June for the third month in a row. New builds are selling at the slowest pace in eight months.

Meanwhile, the inventory of unsold homes – the amount of supply on the sidelines – is rising again. Prices in May were up by 6.4% year-on-year (so a lot stronger than in the UK, for example), but that’s the smallest annual gain since 2017 – and over the last three months, prices have risen at their slowest rate since 2012.

What’s interesting about the US housing market is that historically, despite the fact that it bore so much responsibility for the 2008 crash, it has been a relatively well-behaved property market. Over the very long run, US house prices have only risen in line with inflation. You can’t say the same for the UK.

So the fact that it, too, is starting to struggle, suggests that this isn’t purely a bubble market phenomenon.

Why are housing markets around the world slowing down?

Why is this? What do all of these markets have in common? Because clearly, it’s not Brexit. Nor is it cracking down on buy-to-let landlords. And while most countries have grown a little more hostile to foreign investors (most Canadian cities have imposed strict rules, for example), it’s not the most obvious answer.

Let’s go back to basics for a moment. You buy property with debt. Usually a fair chunk of it. Property can be very lucrative as an investment precisely because of this debt (or “leverage”).

Put down £25,000 deposit. Buy a £100,000 house, using a £75,000 mortgage. Sell it in two years’ time for £125,000. Pay the £75,000 back to the bank. Pocket £50,000. The price went up by 25%, but you’ve doubled your money. Rinse and repeat until you’re a millionaire.

But what makes prices go up in the first place? The rational value of a property (as opposed to the “bubble” value) is dependent on the expected rental income it will generate, and what other people are willing to pay for that income stream. It’s just like a bond in many ways, only riskier, and with plumbing involved.

So if you can get 5% from your bank account, you’ll want a lot more from your property – say 10%. But if you can only get 1% from your bank account, you’ll take a lower yield on your property – say 5%.

Let’s assume that the annual rental is £10,000 and it stays there. So with interest rates at 5%, you’ll happily pay £100,000 for that rental income. But with rates at 1%, you’ll happily pay £200,000. (I’m keeping the examples simple here).

You see what’s happened? The price of the property is basically contingent on interest rates.

And what’s happening around the world now? That’s right. Interest rates have stopped going down. And in some cases (notably the US) they are rising. As a result, there’s not much fuel for prices to go higher (rents are as high as they can go without a real boost in wages), and if borrowing costs rise, that will drive prices down.

As Bloomberg notes of the US, affordability is a huge issue in many of these areas, while prices nationwide are still rising “twice as fast as incomes”. Yet the bigger issues is that “buyers are getting squeezed by rising mortgage rates.”

In short, property (alongside bonds) is one of the asset classes that has benefited most from the decline of interest rates in recent decades. And now that’s reversing.

For “normal” people, that has imposed a ceiling on the amount of borrowing they can arrange – they simply can’t afford to buy at the prices sellers still hope to get. For global investors, they’ve realised not only that the world is becoming more hostile to the free flow of footloose capital, but that, quite simply, in a rising rate environment, property is not a good investment.

What happens next? That all depends on rates.

Source: Money Week