There are many options when looking to fund your next property development project. The way in which you structure any borrowings will have a significant impact upon your long-term returns. We have covered some of the more common project development finance routes below with comments and observations.
BANK FUNDING
After the 2007/8 sub-prime mortgage collapse in the US, which spread throughout the world, it can be difficult to obtain affordable bank funding for property projects. Traditionally banks tend to work on a 70% loan to cost (LTC) ratio and may exceed this at a cost. Performance for larger loans is a real issue however. For some developers this can leave a significant shortfall which may need to be filled with relatively expensive additional forms of finance.
While interest rates on property development funding will vary from project to project, if the LTC ratio is less than 70% interest charged is usually sub 5%, 7% – 8% on loans from 70% to 80% LTC and between 10% and 12% on loans where a higher than 80% LTC has been secured.
MEZZANINE LOANS
As we touched on above, other forms of property development finance may need to be used in conjunction with traditional bank funding to fill any shortfall. One popular option is mezzanine finance which is traditionally in the region of between 10% and 15% of LTC. Mezzanine finance is less expensive than equity finance as it is normally a fixed rate and is ahead of equity in case of losses and allows the developer to retain their equity share.
The obvious problem with mezzanine finance will occur if a project incurs delays or is unfinished. Whatever the situation, the developer will still need to pay back the mezzanine finance and in situations of default this can be converted into an equity stake in the development. On the surface mezzanine finance is more affordable than equity-based finance but default terms can be prohibitive.
EQUITY FUNDING
There are pros and cons to equity funding with investors sharing both the risks and the rewards. Where little or no funding is required the equity returns can be relatively high for the developer. However, where an additional equity investment is required the profits may be split on a 50/50 or pro rata basis, depending upon the details of the agreement. This can have a significant impact upon the returns for a developer although, as we mentioned above, both parties will also share the risk.
In theory equity funding is one of the more expensive options but done correctly it can allow a developer to significantly leverage and increase the size and quality of schemes they undertake. Over the last few years we have seen crowdfunding become more popular and there are also various networks of high net worth individuals willing to invest in property developments. As ever, it is a case of balancing the risk/reward ratio against the profits which you are “giving away” to other equity investors.
Figures from the Nationwide show that UK house prices increased by 0.2% in the month of October. The annual increase from 2.3% in September up to 2.5% in October is a three month high for the UK housing market which has been under pressure of late. It is proving extremely difficult to forecast in the short to medium term how UK house prices will perform having increased to an average value of £211,085. There are a number of factors coming into play which could actually see UK house prices supported in the foreseeable future.
SHORTAGE OF STOCK
A shortage of suitable stock has been a problem for the UK housing market from some time now. We have a lack of newbuilds and many homeowners are reluctant to upsize in the current economic environment instead deciding to stay put. This means that those who are brave enough to upsize are fighting with first-time buyers over a relatively small amount of housing stock. This increases competition which increases prices which drags the whole UK housing market higher. How long will this last? This is a question we have been asking for many years now.
LOW MORTGAGE RATES
UK mortgage rates have been historically low for some time now in light of the 2008 US led mortgage crisis. There is talk that the Bank of England may increase UK base rates for the first time in a decade at its meeting later this week. A potential increase of 0.25% would push UK base rates up to 0.5% which is in itself minuscule but could lead to an increase in UK mortgage rates.
Even the Nationwide has confirmed that an increase of 0.25% in the UK base rates would likely be passed on in full to variable rate mortgage holders. Looking at the wider picture this increase is relatively small but in the current environment, with household incomes being squeezed, more funding diverted towards mortgage payments will place pressure on other areas of household expenditure.
VARIABLE-RATE MORTGAGE HOLDERS
It was interesting to hear Nationwide executives discussing variable rate mortgage holders and the fact that in 2001 they represented 70% of outstanding mortgages. Slowly but surely this figure has fallen to a current record low of just 40% with many people looking to lock in fixed rate mortgages and take advantage of current low base rates. While this is obviously good news in the short to medium term some UK mortgage holders could see a significant increase in their payments when their fixed term ends and they either remortgage or switch to a variable rate.
It is difficult to guess whether the Bank of England will increase base rates this Thursday let alone in the weeks and months ahead but if we’re talking years ahead there is no way that UK base rates will be anywhere near their level today. You could argue there is pressure building across the UK housing sector, wages will struggle to maintain any equilibrium with mortgage rate increases and pressure on UK household incomes will mean a reduction in expenditure and a weaker economy. So, there could be trouble ahead?
Paul Middleton said that although the housing figure would be quite a challenge to fulfil, it could prove to be a positive move for rural landowners.
The development forms part of Shropshire Council’s local plan review.
The council’s cabinet approved a consultation document last week, which will seek the views on the preferred scale and distribution of future developments across Shropshire.
The review includes building 28,750 homes across the county, while the consultation document also looks at employment growth.
The consultation period began last week and closes on December 22.
Mr Middleton, of rural surveyors and estate agents Roger Parry and Partners, said: “A housing figure of 28,750 across the county is quite a challenge to fulfil, that equates to a delivery rate of around 1,430 dwellings a year.
“It therefore follows there will need to be development in the rural areas to assist in meeting these targets, and this places great emphasis on the emerging Hierarchy of Settlements policy.”
The Hierarchy of Settlements document puts forward rural settlements that have gone through a screening process for size, population, service provision, internet links, transport links and employment opportunities.
Mr Middleton added: “If adopted, the Hierarchy of Settlements could provide opportunities for development that presently are not achievable, which is very positive indeed for rural landowners.
“We will of course be liaising closely with the council during the course of the consultation to ensure that our planning team are best placed to advise clients on the development opportunities, that will undoubtedly come to fruition in the future.”
The extra 10,347 houses are mostly planned for the towns in Shropshire, with 30 per cent planned for Shrewsbury, 24.5 per cent planned for the bigger towns such as Market Drayton, and Whitchurch, 18 per cent for smaller towns such as Much Wenlock and Bishop’s Castle, and 27.5 per cent for rural areas.
Ian Kilby, planning services manager, said: “In the recession there were about 800 houses built per year, and last year we had 1,910 delivered.
“It’s only a few years ago that next to no houses were being built.
“There was significantly more development last year than there was.”
But the council admitted that, as of this year, there were more than 11,000 cases where planning permission had been granted for homes where construction was yet to start.
LONDON (Reuters) – The Bank of England looks set to step into the unknown on Thursday, when it is expected to raise interest rates for the first time since 2007 at a time when growth appears weaker than before any other rate rise of the past 20 years.
Having cut rates to a record low 0.25 percent in August 2016 after Britons voted to leave the European Union, the Bank is now correcting course and falling in line with the U.S. Federal Reserve and the European Central Bank, which are either raising rates or scaling back stimulus.
Whereas the United States and the euro zone are enjoying robust growth, however, Britain’s economy has grown at its slowest pace in more than four years over the past 12 months.
Quarterly growth of 0.4 percent offers the weakest backdrop to any rate rise since the Bank became independent in 1997.
True, inflation is at a five-year high of 3.0 percent, a full percentage point above the Bank’s target, but that is mainly because the pound is an average 11 percent weaker against the currencies of Britain’s main trading partners since the Brexit vote.
The Bank has often overlooked past spikes in inflation if they were caused by currency fluctuations that were deemed to be temporary.
Inflation is set to fall this time too, but only slowly, as the Bank judges domestic inflation pressures are pending.
Partly due to stagnant productivity since the 2008 financial crisis – and partly due to concerns about the effect of Brexit on immigration, trade and investment – BoE Governor Mark Carney thinks the economy cannot grow as fast as it has in the past without generating excess inflation.
“We’re in a new paradigm,” says George Buckley, an economist at Nomura who was one of the first to sense a change at the central bank earlier this year, when most economists were saying they did not expect rates to rise until 2019.
Raising rates now would be the biggest call on monetary policy Carney has made as governor, and may shape his legacy.
Carney has faced criticism from economists who say his past guidance on monetary policy has been unhelpful, and from Brexit supporters who say he is too focused on the risks of leaving the EU. But until recently his broad approach to interest rates has been fairly uncontroversial.
For most BoE watchers, the likelihood of a rate rise only became clear in September, when minutes of the nine-member Monetary Policy Committee’s meeting that month showed underlying price pressures were no longer a minority concern.
Two policymakers voted for a rate rise, and a majority of the others said they expected to do so “over the coming months”.
RAISING RATES “MAD”
Almost all economists polled by Reuters last week expect the Bank to raise interest rates to 0.5 percent from 0.25 percent on Thursday. Most do not expect another one next year and 70 percent said even one rate rise would be a mistake. The latter view is common in markets, too.
“Personally, I think it would be mad,” Jim McCaughan, chief executive of Principal Global Investors, which manages $430 billion of assets, told Reuters earlier this month.
“You’d be tightening at a time of economic softness to defend against a weakness in sterling that you need (to boost exports).”
The Bank says its policy decisions are not driven by exchange rates. When Carney gives his news conference at 1230 GMT on Thursday, he is likely to focus on a 42-year low in unemployment and how it heralds more upward pressure on wages and inflation.
The Bank has been here before, however. Unemployment has repeatedly fallen further than the BoE forecast in recent years, while wage growth has remained stubbornly around 2 percent, half the 4 percent rate associated with pre-crisis rate rises.
Investors will be keen to glean what is meant in practise by the Bank’s long-standing stated expectation that it will only raise rates “at a gradual pace and to a limited extent”.
Markets have priced in an almost 90 percent chance of a rate rise on Thursday, but then expect the Bank to wait until late 2018 before raising again, Nomura’s Buckley said.
He said that was probably too long for the BoE’s tastes. On the other hand, however, Carney will not want to box himself in or lead the wider public to believe he plans to return rates to their pre-crisis level of around 5 percent.
Economists do not expect one or two rate rises will hurt growth much unless businesses or the public think many more will come and curb spending as a result.
BoE forecasts showing inflation is still expected to exceed its target even after three years might be the clearest sign that the Bank thinks faster rate rises are needed, Buckley said.
Either way, the stakes are high both for the Bank and its governor, who has said he will step down at the end of June 2019.
“If he presides over a tightening of monetary policy and it slows down the economy, that’s what he will be remembered for,” McCaughan said.
LONDON, (Reuters) – Britain’s housing market and consumer economy kept most of their momentum last month, lending figures from the Bank of England showed on Monday, leaving the central bank on track to raise interest rates for the first time in more than a decade on Thursday.
The number of mortgages approved for house purchase fell to a three-month low in September at 66,232 from an upwardly revised 67,232 in August, slightly above economists’ average forecast for it to slip to 66,050 in a Reuters poll.
The growth rate in unsecured consumer lending nudged down to 9.9 percent on a year-on-year basis in September from 10.0 percent in August, matching July’s growth.
In cash terms, net consumer lending rose by 1.606 billion pounds last month, a fraction above the highest forecast in a Reuters poll.
Last month the BoE said British lenders needed to hold an extra 10 billion pounds of capital to guard against consumer loans going sour, as it was concerned that banks had overestimated the creditworthiness of their borrowers.
Government data on Friday showed that personal insolvencies rose to a five-year high in the third quarter.
Official data last week showed an unexpected pick-up in gross domestic product growth to a quarterly rate of 0.4 percent in the third quarter – still well below its long-run trend, but an improvement after the weakest first half since 2012.
Moreover, with inflation at a five-year high of 3.0 percent and unemployment at its lowest in more than 40 years, the BoE looks on track to raise interest rates on Thursday for the first time since 2007, reversing a rate cut made in August 2016.
The initial impact of raising rates back to 0.5 percent – their level for seven years until August 2016’s rate cut – may be muted for most Britons.
Less than 30 percent of households have mortgages, and 60 percent of these are fixed-rate, compared with just 30 percent 15 years ago. For the average borrower with a variable rate mortgage, interest payments will rise by 180 pounds ($237) a year if rates return to 0.5 percent, according to mortgage lender Nationwide.
Mortgage lending, which lags behind approvals, rose by 3.848 billion pounds in September and is 3.2 percent higher on the year. Mortgage and consumer lending combined is up 4.0 percent.
Britain’s housing market has slowed since June 2016’s vote to leave the European Union, especially in London and neighbouring parts of England.
Markets have a tendency to panic when central banks threaten to raise interest rates. In 2014, the US Federal Reserve and its then boss, Ben Bernanke, senttraders across the world into a spin when he merely hinted that the era of almost zero rates might be ending.
It’s been a decade since the Bank of England last increased the cost of borrowing, so it is no surprise that this week’s vote by the monetary policy committee, which Threadneedle Street has sketched out as a good moment for a rise, is being closely watched.
Nine committee members hold the key to unlocking 10 years of ultra-low rates – with five drawn from the Bank’s payroll and four external members from industry and the City. The latter serve a three-year stint, which is often extended to six years.
Bank of England governor Mark Carney is among many on the MPC to have hinted that 2 November will be the day the Bank should at least reverse its emergency 0.25% set in August 2016, which was designed to ensure that the economy did not take a dive in the wake of the Brexit vote. And having listened to one carefully coded hint after another in recent months from what is clearly a majority of members, markets have judged that an increase is now almost nailed on – with a 90% probability.
However, the case for a rate rise, as Carney and his colleagues always stress, is finely balanced and could go either way once they have sieved through all the economic data. Here we consider the arguments for raising them versus the reasons to hold steady.
The case for higher rates
The Bank of England was set two targets when it was reconstituted by Gordon Brown in the late 1990s and granted the power to set interest rates independently: to maintain inflation at around 2% and to make sure that monetary policy kept the economy’s wheels turning.
In the past 10 years these have proved to be conflicting aims, because to raise rates has been seen as an almost certain way to kill off growth. That wouldn’t be the case in more normal times, but in the aftermath of the banking crash, with lenders initially strapped for funds and regulators concerned to keep the financial sector on a tight rein, low interest rates were seen as the only way to keep money flowing around the economy. And that is especially true when so much household spending is based on borrowed money.
So the second concern – to keep GDP expanding – has won out over the imperative to maintain inflation steady at 2%, and inflation has been allowed to soar to 5% – as it did in 2012, when the Bank sat firmly on its hands and did nothing.
Forecasts for inflation don’t show it going back to 2012 levels, but with a rate of 3% recorded in September and predictions of rises for at least the next couple of months, the Bank must consider increasing the cost of borrowing to reduce the demand for goods and services, and calm price rises.
Further price increases could already be in the pipeline, according to some MPC members, following the fall in unemployment to 4.3% in the three months to August. As Howard Archer, chief economic adviser to the EY Item Club, says, the joblessness rate is at its lowest since 1975 and well below the 4.5% equilibrium rate the Bank believes determines full employment and is the trigger for higher wages. With more money in their pockets, workers could be tempted to borrow and spend even more, adding to the pressure on prices.
It’s not just jobs: the economy has held up much better than most forecasters, including the Bank, predicted following the Brexit vote. It has grown throughout the year – when many thought it could fall into recession – after three previous years of growth. If the Bank won’t raise rates against this backdrop, then when?
Some economists also believe the bank should take the opportunity to raise rates now because it may need to cut them again the future. At 0.25%, the bank has no real leeway for a cut that would act as a stimulus. By raising rates – maybe once, maybe more – Threadneedle Street starts to rebuild its ammunition for use in a crisis.
And then there is the question of pride. This is a huge factor after months during which the Bank has prepared the ground for a rate rise. As Archer says: “If it fails again to follow through with a rate hike, it will risk losing credibility.”
It would also probably prompt a fall in the pound – which would stoke inflation even further.
Carney’s reputation as a modern-day Grand Old Duke of York is under particular scrutiny. He has used speeches and reports in the past to tell businesses and households that higher borrowing costs are imminent – only to retreat back down the mountain. It could be that his influence will wane should he refuse to make good on yet another threat.
The case for the status quo
The economy may have grown for almost four straight years, but the rate of growth has declined since its initial burst in late 2013 and is now the lowest of all major economies. Next year, the OECD says Italy and Japan, often derided as the zombie economies of the developed world, will grow faster than the UK.
Last week the Office for National Statistics said Britain grew by 0.4% in the third quarter of the year, compared with 0.3% in the first two quarters.
The MPC’s newest recruit, Sir David Ramsden, formerly the Treasury’s chief economic adviser, said in his confirmation hearing that given rates of growth almost half what they were in 2015, the economy was too weak to withstand higher borrowing costs.
With the government seeking to cut back on borrowing, and large corporations hoarding enough cash to avoid the need to borrow, driving up the cost of loans to consumers and small businesses could push the economy further towards zero growth.
Brexit is another reason to err on the side of caution and keep rates where they are. Consumers have already become more circumspect with their spending. High street surveys show consumers keeping their wallets shut unless there is a good reason to open them. The CBI’s latest figures showed the steepest fall in retail spending since the depths of the post-banking crisis recession in 2009. High street bellwethers John Lewis and Debenhams have both warned of challenging trading. Car sales have already plummeted, as have sales of furniture. According to the Halifax, confidence in the housing market is at a five-year low.
Chris Williamson of economics consultancy IHS Insight says the “slow erosion of growth” may continue. He points out that across all sectors of the economy, inflows of new business in September were at their lowest for 13 months, suggesting that demand for goods and services “has waned again”.
Business optimism is weak, he adds, which is another indication that businesses are about to suffer a further drop in activity and that the economy will slow “towards stagnation at best”.
Archer of the EY Item Club believes inflation is set to fall back markedly from around the turn of the year as the impact of past sharp falls in sterling fade. The weak pound has seen many businesses suffering a large rise in import costs, which a number have absorbed through lower profit margins and passed on to workers through sub-inflation wage rises. Nevertheless, prices have crept up. Without further falls in sterling, prices will stabilise on their own. An interest rate rise in this situation could make a bad situation worse.
It’s a danger Ramsden has been explicit about wanting to avoid. But pushing an already struggling economy, dogged by Brexit-related uncertainty, towards recession is not something any MPC member will want to be remembered for.
Bank of England Governor Mark Carney is now expected to vote for a rate rise. Photograph: Andy Rain/EPA
Where the MPC stands
Gertjan Vlieghe External member
A former hedge fund economist, Vlieghe, an external member of the MPC, said in August: “This is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late.” Last month he said the mood was changing: “The appropriate time for a rise in bank rate may be as early as in the coming months.” How hawkish? 8/10
Silvana Tenreyro External member
A former professor at the London School of Economics, Tenreyro is a new appointee. At her first public engagement last month, she said: “We are approaching a tipping point when we will need to reduce some of that stimulus.” She added that unemployment still needed to be lower: “A premature increase might be very contractionary, so a mistake there might be very costly.” How hawkish? 6
Michael Saunders External member
Former Citibank economist Saunders voted for a rise in September, to dampen looming price pressures. In August he said: “Our foot no longer needs to be quite so firmly on the accelerator in my view. A modest rise in rates would help ensure a sustainable return of inflation to target.” How hawkish? 10
Ian McCafferty External member
The former chief economic adviser at the CBI voted in July to raise the base rate from 0.25% to 0.5%. He has voted for a rise ever since, arguing that the “pick-up in inflation is not something we can just ignore”, especially when the “healthy performance of businesses in the past year shows the UK economy could cope with higher interest rates”. How hawkish? 10
Andrew Haldane Chief economist
Haldane was once a fervent supporter of low interest rates, but in the summer hinted that he was more inclined to start pushing them higher. In June, he said a partial withdrawal of the emergency post-Brexit package of an interest rate cutand an extra £60bn of quantitative easing “would be prudent relatively soon”. How hawkish? 6
David Ramsden Deputy governor
In charge of markets and banking, the former Treasury economist says slowing growth and declining real wages mean now is not the time for a rate rise. He said last month: “Despite continued robust growth in employment, there is no sign of second-round effects [demands for higher pay] on to wages from higher recent inflation.” How hawkish? 2
Jon Cunliffe Deputy governor
In charge of financial stability at the Bank, Cunliffe is one of the committee’s most risk- averse members. Last month he told the Western Mail that the UK economy had “clearly slowed”, and that any rate rises would be gradual. As he put it: “The exact timing of when that starts? Well, that for me is a more open question.” How hawkish? 4
Ben Broadbent Deputy governor
Responsible for monetary policy, Broadbent is a close confidant of Carney and keeps his cards close to his chest. In July he stressed the weakness of the economic outlook, saying: “It is a bit tricky at the moment to make a decision [to raise rates]. I am not ready to do it yet.” How hawkish? 6
Mark Carney Governor
Carney is expected to vote for a rise after saying in September that the “possibility has definitely increased”. To give a little more context to his decision, he said: “The majority of committee members, myself included, see that that balancing act is beginning to shift, and that … to return inflation to that 2% target in a sustainable manner, there may need to be some adjustment of interest rates.” How hawkish? 6
Confidence in the UK housing market has slipped to its lowest level in five years, sounding renewed warnings over the health of the economy.
One in five British adults surveyed by the Halifax bank expect house prices will fall in the next year, in the weakest reading for consumer expectations since October 2012. Young people under the age of 25 and those living in London are found to be least optimistic.
The drop off in confidence comes amid growing concerns over the strength of the economy, with rising inflation and weak wage growth putting pressure on British households. It also comes as the Bank of England prepares to raise interest rates for the first time in a decade from as early as next week.
Despite the looming increase in the cost of borrowing, gathering a deposit is viewed as the biggest barrier to buying a home. According to the survey of almost 2,000 British adults, almost two-thirds see this as the main barrier, whereas just 15% worrying about the availability of mortgages or concerns about higher interest rates.
Of the 535 mortgage holders questioned in the survey, only a third said they were anxious about rising interest rates affecting their ability to meet repayments. This was down from 42% in 2014.
The survey also shows concerns over personal finances rising up the list of potential barriers, while job security was found to be a major worry among those looking to buy a home. The average house price stood at £222,293 in August.
The lowest levels of unemployment since the mid-70s are still failing to boost the bargaining power of employees in the UK, according to the latest official figures. When taking account of inflation, real wages fell by 0.4% in the three months to August, the sixth consecutive month of negative earnings.
London was the only region in the Halifax survey where the balance of people thought it was a bad time to buy, with those in the West Midlands and Wales the most positive. Those aged between 16 and 24 were the only age group with a negative buying outlook, while those over 65 were the most positive. Across the UK about half of those surveyed thought it would be a good time to buy.
Russell Galley of Halifax said: “Housing market optimism has declined significantly over the past year, with almost half of people expecting a general slowdown in the market.”
IN A meeting room on a cold autumn day, the governor of the Bank of England settled into a witness chair to give evidence to a group of MPs. Worries were mounting about the economy. GDP growth was slowing and households were highly indebted. Nonetheless the Bank of England began raising interest rates. The governor told everyone to relax. Concerns about a “Christmas debt crisis” caused by higher rates were overblown, he said: “People have exaggerated the vulnerability of the economy to likely changes in policy.”
That was in 2003, when Mervyn King was the bank’s governor. For the first time since then, and under a different boss, Mark Carney, the bank is expected to start raising interest rates once again, after a long period of inactivity (see chart). Inflation is 3%, well above the bank’s 2% target. GDP grew by 0.4% in the third quarter, above expectations. As in the early 2000s, members of the bank’s monetary-policy committee (MPC) are coming round to the view that tighter monetary policy will have a benign effect on the economy. Are they right?
By raising or cutting the benchmark interest rate, the MPC influences the rate at which high-street banks can borrow—and, in turn, the borrowing costs faced by households and firms. In the post-war period it averaged around 6%. Yet during the crisis of 2008-09 the bank slashed it to stimulate the economy. It was cut again after last year’s Brexit referendum, to 0.25%, the lowest on record. Most economists believe that on November 2nd the MPC will change direction and raise it to 0.5%.
The reaction of the economy as a whole to tighter policy will be largely shaped by how households respond. Their spending accounts for some 60% of GDP. At first glance, Britain’s households look prepared for what is to come. True, the stock of household debt (mortgages plus consumer credit) is nearing 140% of income, which is high by historical standards. Higher interest rates would result in higher payments for those with debts. They would have less money left over for everyday expenses.
However, many Britons would also earn more interest on their savings, which are worth around 120% of income. That would give them more spending power. A rise of 0.25 percentage points in the base rate, passed on fully to savers and borrowers, would cost less than 0.1% of incomes. No big deal.
Yet such a calculation understates the probable impact of higher interest rates. For one thing, the circumstances are unusual. The bank’s “inflation-attitudes survey” suggests that when it has tightened monetary policy in the past, the public has inferred that further rises are on the way. The bank has tried before, and failed, to forestall such a reaction. The last time the MPC raised rates, it stressed that “no immediate judgment was being made about the future path of rates.” No matter: subsequently, a big majority of the population thought that further rises were likely.
The public’s reaction is especially hard to predict this time around. Interest rates used to go up and down frequently. Today, after a decade with no rate rise, many adults are familiar only with the Bank of England cutting the cost of borrowing. If people start to worry that their incomes will be squeezed more tightly still in the coming months, then consumer confidence and spending could fall by more than the MPC expects.
The effects of higher interest rates will also be unevenly felt across households. Some have plenty of savings, others have big debts. Few have both. Data on the distribution of assets and liabilities are poor. What evidence there is, however, makes for uncomfortable reading.
One worry concerns those who would benefit from higher interest on their savings. Income-bearing financial assets are unequally distributed. Such inequality also runs along generational lines. What will the wealthy do with the extra income from their savings? People with large pots are by definition squirrellers, not splurgers. Retirees have a recent additional incentive to save any windfall. The inheritance-tax regime is becoming increasingly generous: by 2020 a couple will be able to leave £1m ($1.3m) tax-free to their children, if it includes their house, up from £650,000 last year. All this suggests that the boost to savings from higher interest rates is unlikely to translate into much extra spending.
Owe dear
On the other side of the equation, households with heavy debts may struggle with higher rates. Britain’s pile of mortgage debt is concentrated among far fewer households than it was a decade ago. Prospective buyers have to stretch to get a foot on the housing ladder. Since 2012 the average mortgage for a first-time buyer has equalled 3.4 times their income, up from 2.6 times at the turn of the millennium.
Many have locked in low rates on these mortgages with fixed-rate products. Such deals typically last for between two and five years, however, not the 30 years that is common in America. And of all outstanding mortgages, roughly 40% are on variable rates. Our analysis suggests that, because mortgages have become so hefty, a given interest-rate rise would ultimately result in a bigger squeeze on recent homebuyers’ income than at any other time on record.
Poorer Britons could also suffer. Lately the rate of personal insolvencies has risen, in part because of tough welfare policy and falling real household incomes. Those whose incomes have been squeezed often rely on short-term loans to tide them over. If the cost of repayment rises, more might struggle. Indeed, a survey in the bank’s latest inflation report found that, after a hypothetical decline in real incomes, “households who would reduce real spending the most tended to have fewer savings and be more concerned about their debt.”
Whatever happens next week, rates will remain low, meaning that monetary policy will continue to favour borrowers over savers. But in shifting the balance, the bank must tread carefully. It has signalled that interest rates will rise only at a snail’s pace—perhaps 0.25 percentage points every year. A more rapid increase could prove to be an unwelcome jolt.
London’s commercial property market outlook is more subdued than elsewhere in the country, with the capital bucking the UK trend for rising demand from investors and occupiers.
Almost three quarters of respondents to a survey by the Royal Institution of Chartered Surveyors (RICS) warned the market may be in some stage of a downturn, when outside of the capital, expectations were generally positive for office, retail and industrial rent.
The survey of 347 of RICS’ commercial property members found that negative sentiment regarding office and retail rent cancelled out positive expectations for industrial rent in the capital.
In the near term, London is also displaying more cautious sentiment, with weakening occupier demand producing negative rent expectations, while availability has picked up, as have inducements.
When it comes to the investment market, RICS said trends appear a bit more resilient, but headline capital value expectations are now more or less flat.
The central London market also had the highest proportion of respondents viewing it as overpriced to some extent, at 67 per cent.
Simon Rubinsohn, RICS’ chief economist, said:
The underlying momentum in the occupier market remains a little more challenging in the capital than elsewhere with rents expected to remain under pressure away from the industrial sector. This is also mirrored in valuation concerns, with around two thirds of respondents viewing the London market as being expensive.
Despite this, foreign investors continue to view London in general and the office sector in particular as an attractive home for funds.
Rubinsohn said a particular issue going forward will be how the market responds to the “likely first interest rate rise in a decade next month”.
He said: “Given that expectations are only for a modest tightening in policy, the likelihood is that it will be able to the weather the shift in the mood music. But this remains a potential challenge if rates go up more than is currently anticipated.”
LANDLORDS of houses of multiple occupation [HMOs} and commercial dwellings with flats above shops faced a surprise earlier this month (Tuesday 3 October) during a council crackdown.
Officers from the Council’s housing, food safety and waste enforcement teams along with officers from Essex Police visited 80 homes suspected to be operating as unlicensed HMOs.
After the day of action, three licensable HMOs operating without a license, 18 non licensable HMOs, four landlords for planning and building enforcement prosecution and three empty homes were found and seven Environmental Protection Notices were served on local businesses.
Portfolio Holder for Housing, Cllr Rob Gledhill said: “Houses of Multiple Occupation Landlords are currently subject to mandatory licensing for three storey buildings occupied by five persons in two or more households.
“This currently limits the number of properties under this scheme but I am anticipating that the requirement is going to be extended by the government to include all properties with five or more people in two or more households meaning the 18 non licensable HMOs identified during the day of action will fall under this category next year.”
Letting a licensable HMO without a licence is a criminal offence and can result in an unlimited fine upon conviction. Persons managing or having control of a licensable HMO without a licence may also, in certain cases, have to repay rent. This applies to rent paid by tenants or by local authorities in housing benefit.
Cllr Gledhill added: “I would like to thank all those taking part in this operation to show we take this issue seriously. This was a coordinated effort to tackle poor performing landlords of HMOs and flats above shops where tenants are complaining to us about living in poorly maintained homes.
“`While we recognise that most private landlords comply with regulations and offer a good service to their tenants, it is important that we deal robustly with those in the sector who fall short of these standards.
“We are looking at extending licensing to include small HMOs in certain parts of the borough associated with anti-social behaviour and poor health and safety conditions to ensure that minimum standards are being met.”
If you have information about an unlicensed HMO, you can give us details by e-mailing [email protected] or visit: thurrock.gov.uk/houses-in-multiple-occupation for more information.
