While the UK property market continues to perform ahead of expectations the same cannot be said of the UK economy. If we compare the UK economy to its overseas counterparts it is still relatively strong although we are starting to see signs of reduced growth – amid concerns for major economies such as China. Against this background, Andy Haldane, the Bank of England’s chief economist, has put forward a case for reducing base rates in the short term.
Increased liquidity
A reduction in UK base rates would obviously reduce the cost of borrowing which is one of the main factors behind the suggestion from the Bank of England’s chief economist. This would encourage individuals and companies to borrow funds to invest/spend which would feed inflation, currently around 0%, and push it back towards the Bank of England’s target rate of 2%.
Cheaper borrowing rates would obviously assist those looking to buy UK property although in reality this would probably be a side effect as opposed to one of the core goals. When you bear a mind that UK mortgage rates are relatively low, due to low base rates, a further reduction would obviously cap any potential increases in the short to medium term.
How would this impact the UK housing market?
As many in the money markets are already factoring in an increase in UK base rates, probably in the first half of 2016, a reduction would catch many offguard. This would probably lead to weakness in sterling, which has strengthened on hopes of a base rate rise, thereby increasing the attractions of the UK property market to overseas investors. When you also factor in cheaper borrowing for domestic buyers in the UK we could see a significant squeeze in the market.
Whether this would lead to overheating of the UK housing market is debatable because with lower borrowing rates the UK government could perhaps afford to reduce the financial incentives available today. However, it would certainly be a tricky balancing act trying to keep the UK property market under control while breathing life into the economy.
The question of inflation
To all intents and purposes the near 0% rate of inflation in the UK is as a consequence of the falling price of oil on the back of reduced worldwide demand. On the surface consumers and businesses might have been expected to welcome a reduced rate of inflation but in reality it can have a significant impact upon businesses and property markets.
The lower the rate of inflation the more difficult it is to increase wages, increase the selling price of goods and services and also rent rates. In the UK property market in particular this can have a devastating impact because the rate of rental income is very often used as a barometer to value property. Therefore, putting aside recent demand for UK rental accommodation, this could rather bizarrely impact the short to medium term growth of property prices. However, as we mentioned above, on the flipside a reduction in the cost of borrowing would increase demand for UK real estate.
Who would be an economist in the current environment!