It is extremely difficult to predict when worldwide interest rates will return to more “traditional levels” especially when institutions such as the Bank of England seem to have no idea. The Bank of England has on numerous occasions in recent months suggested that UK base rates would increase only for external pressures to change these policies at the last minute. Indeed the most recent forecasts suggest that UK base rates may not increase until 2018 although this may change.
While there is no doubt that record low interest rates around the world are feeding the frenzy for property investment, when will we return to more traditional markets?
It is all about real returns
While rental yields do vary across different markets it is worth noting that the real return, taking into account interest rates and inflation, has increased dramatically over the last few years. Inflation is likely to be subdued for some time to come especially with the problems in the oil market and interest rates are unlikely to rise in the foreseeable future. Record low interest rates have so far failed to encourage mass spending or improve economic performance and other fiscal policies have been introduced to try and encourage economic recovery.
Are investors ready for an increase in interest rates?
Recent trends show that property is proving to be extremely popular amongst those who have historically held significant funds on deposit. The attractions of relatively high yields in the property market have seen a significant shift in funds away from deposits and into this investment sector. Those who are funding property transactions from their savings are unlikely to feel any major financial pain once the interest rate cycle turns but those who are mortgaged to the hilt, at current low rates, will feel some pain.
While 2018 seems well into the future at this moment in time, money markets will continuously correct themselves as we approach the inevitable increase in base rates. This will see a gradual increase in property finance costs and unless accompanied by a significant economic recovery this could place pressure on household incomes.
Can governments afford a property price correction?
There are many different aspects of everyday life which impact governments around the world especially those with elections on the horizon. When you consider that an investment in your home is likely to be the largest in your lifetime no government would ever want to see a significant property price correction when seeking your support. As a consequence, while governments will need to be vigilant with regards to fiscal policy they will always, where possible, protect the underlying property market from undue shocks.
This places the authorities in a very difficult situation in the longer term because when economies do finally show signs of recovery they will be forced to increase base rates which will increase the cost of finance. When you bear in mind the amount of people who have taken advantage of record low mortgage rates around the world it is difficult to see anything but challenges ahead, particularly for those who have stretched themselves to the limit at current rates. Any increase in base rate/mortgage rates would likely have a significant impact upon their ability to pay.