Policymakers at the Bank of England have pulled the trigger on looser monetary policy in the face of threats to the economy from the uncertainty surrounding Brexit, after the country voted to leave the EU in a historic referendum on 23 June.
The central bank's Monetary Policy Committee (MPC) voted to slash the base rate in half to 0.25% — a new all-time-low — and pump an extra £170bn ($223bn) of stimulus into the economy. Here is what it could mean for the housing market.
Those with variable rate mortgages might enjoy cheaper monthly costs
If your mortgage interest rate tracks the base rate, you could be laughing. Your monthly mortgage repayments will likely drop to reflect a lower rate, though some lenders may have certain get-out clauses.
For ordinary homeowners, it means more money in their pocket every month, or to pay other bills. For buy-to-let investors, it means a better yield. "The UK continues to have a severe housing shortfall, meaning demand for new homes is set to remain strong for years," said Ray Withers, chief executive of Property Frontiers, an investment firm. "Strong demand and an interest rate cut are a great combination for buy-to-let property investors. While interest rates have gone down, yields have remained the same, meaning that the buy-to-let profit margin has effectively gone up overnight."
Mortgage deals may get marginally better but not necessarily
Low rates support mortgage lending and will continue to do so. The Bank of England wants lenders to pass on the benefits of a lower base rate to consumers. To encourage this, it has a £100bn fund called the Term Funding Scheme (TFS) which will lend to banks at rates near to the new base rate. But there is no guarantee banks will pass on such lower costs. Or even be able to.
The mortgage market is already hyper-competitive. Lenders are probably offering more deals and discounts than they ever have, with super-low interest rates on many mortgage products. How much lower can they go before things become unprofitable, or too risky? The Council of Mortgage Lenders (CML) noted that since the last rate cut in March 2009, the average mortgage rate has fallen from 3.8% to 2.9%. But this is impacted by all sorts of factors, not just the base rate, such as bank funding costs, competition, and risk, among other variables. The CML said it "follows that a rate cut does not automatically feed through on a like-for-like basis to mortgage rates. Future pricing will depend on all the factors above and is a matter for individual lenders."
Those saving for a deposit will have to be shrewder
The rate cut will impact savers, who will have to work their money harder for better returns. Saving in bog-standard accounts just got even worse. But, if the loosening of monetary policy has its desired effect, the economy will be stronger, something savers should welcome. Those putting money away for a deposit on their first home must look carefully at what will yield the best returns on their savings — the Help to Buy ISA, which is topped up by the government, is a great place to start.
Weaker sterling may attract more foreign investment
In the immediate aftermath of the vote for Brexit, sterling fell sharply, though it since recovered some of those initial losses. After the MPC's decision, sterling tumbled further. This weakening of sterling, which is likely to be prolonged, may catalyse more foreign investment into the housing market, particularly from dollar-based investors. But things have changed thanks to the prospect of Brexit — will a sterling discount be enough to overcome the political and economic uncertainty, and recent stamp duty hikes, weighing on foreign investors' minds? And for those who invested in the recent past, the capital value of their investments relative to their own currencies has just gone down — not an attractive prospect for potential buyers if sterling may yet fall further.
Looser monetary policy may stoke property prices even more
Some research has suggested that the billions of pounds of gilt-buying QE and record-low interest rates have pushed investors away from safe-haven gilts and towards higher returns elsewhere, such as equities and property. Moreover, low rates enabled households to cope with higher mortgages. In a competitive market with a supply shortage, that powered house price growth. Does this mean the boost to QE and further cut to interest rates will fuel property prices?
The fundamentals remain the same
Affordability concerns, a cap of 4.5 on the loan-to-income ratio for the bulk of mortgage lending, Brexit uncertainty, and a weaker economic backdrop should all soften the housing market over the next couple of years. But mortgage credit is cheap and probably even cheaper now. There is a protracted housing supply shortage. Employment, though vulnerable to an economic downturn, remains strong. These fundamental factors mean little has changed from a 'big picture' perspective of the housing market and make a drastic correction or crash unlikely, though not impossible.
Capital Economics said in its forecast, which factors in a 0.25% base rate, UK house prices should rise by 2% in 2016, 2% in 2017, and 3% in 2018. Reacting to the rate cut, the research consultancy said it "seems unlikely that today's stimulus measures will give a fillip to the market, but they will at least help to underpin it."