The Wire: Winter 2021Primed to rise? Inflation and property prices rise as interest rates remain low

(Estimated read time 5 minutes)

Primed to rise? Inflation and property prices rise as interest rates remain low

Interest rates have been at an all-time low of 0.1% since 25 March 2020, when the Bank of England (BoE) faced the unprecedented effect of the pandemic and the early days of the first national lockdown.

However, if the BoE want to stop inflation spiralling out of control, they’re going to have to act. The Bank has already announced that, as the economy recovers from Covid, they expect UK inflation to rise to 5% in the spring before falling back.

But, although the target is 2%, inflation is currently running at 3% and is likely to rise even further, as shown in the chart below.

Source: BoE, published in the Telegraph, October 2021

Urgent action is required to stall rising prices. This means raising interest rates, which many investors expect to happen in the next few months. 

This is supported by words from the governor of the Bank of England, Andrew Bailey. In October, he warned that interest rates will be pushed up if higher inflation becomes persistent. 

Interest rates remain at an all-time low of 0.1%, for now

Although higher interest rates can help to keep inflation levels reasonable, in November the BoE voted to keep interest rates at 0.1%. It is hoped that retaining this lower rate will help support the economy and foster growth.

The problem the Bank faces is that, while they need to slow the increase in prices of everyday goods, they do not want to increase the cost of borrowing just yet. This is because of the negative effect a rate rise could have on the post-pandemic economic recovery. 

Whenever it happens, a rate rise will help savers get a better return on their money and encourage people to save rather than spend. 

However, mortgage borrowers could see their repayments start to rise – and so locking into one of the low-cost fixed-rate deals available in the market could be a shrewd move.

Mortgage lenders have plenty of funds to lend to borrowers

Thanks to record amounts of money saved during the pandemic restrictions over the last 18 months, banks and building societies have plenty of funds to lend to borrowers. 

Now, with a rate rise in the offing, many mortgage experts are advising borrowers to find a fixed-rate deal. 

In early November, financial analysts Moneyfacts report that it is possible to fix your mortgage rate at around 1% for between two and five years. Locking into a medium-term deal at such a low interest rate could protect you against the base rate rising in the near future.

House prices rose by 10.6% in the year to August 2021

House prices are rising everywhere and even London, which lost out thanks to an exodus during the pandemic, is showing signs of recovery.

According to the Office for National Statistics, UK house prices rose by 10.6% in the year to August 2021 – an increase from 8.5% in the year to July.

Property prices in central London are driven by high net worth and ultra-high net worth buyers

As the first wave of the coronavirus pandemic hit the UK in March 2020, 653 luxury brand and supercars were registered for the first time in the UK. Compare this to the same period in 2019 when 2,044 such cars were registered. 

The chart below is visual proof of the disruption Covid has had on the spending patterns of high net worth and ultra-high net worth individuals. And it’s these people who breathe life into the prime central London property markets. 

Source: Savills Research, LonRes, DVLA

By the end of March 2021, new car registrations across these same luxury brands had returned to 1,487. The recovery for prime central London property market has been even stronger.

Aided by the easing of restrictions and the return of office workers to the capital, London house prices saw growth of 1.4% during the third quarter of 2021. 

Prime London houses with six or more bedrooms have risen by an average of 6.2% in the past year and values of five-bedroom properties are up 5.3%.

Primed for a price recovery

As international travel restrictions continue to ease, property values in prime central London are poised for further recovery. 

Although it’s difficult for experts to predict the timing, in September Savills were forecasting values to increase by an average of 2% during 2021, followed by a more significant recovery in 2022, with a forecast growth of 8%.

Growth forecasts for prime central London over the next five years

Source: Savills Research (Forecasts apply to average prices in the second-hand market. New-build values may not move at the same rate.)

While interest rates remain low for the time being, and with property prices on the rise in central London, all the signs suggest that if you were thinking of buying property, the time to act is now.

Current rates are so low that a recent study from Savills found that mortgage borrowers are paying out less in interest than at any time in the past two decades. 

Despite warnings from the BoE that interest rates will have to rise, mortgages have never been cheaper. So, now could be the perfect time to review your arrangements and to consider a fixed-rate deal.

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