The Bank of England is widely expected to cut its bank rate from its current level at 0.5%. The bank rate has been dormant at that level since March 5th, 2009. Earlier this year, hardly anyone would have expected that it would erupt… lower.
But it’s not the only rate headed lower. The 10-year UK gilt yield, as I reported last week, is below one per cent (currently at 0.77%). And here’s the shocker: the drop in UK yields may spur borrowing in the property market! How would that work? The BBC reports the following:
A 10-year fixed rate to be launched by the Coventry Building Society on Friday is thought to be the cheapest such deal on record. Barclays, HSBC, Metro Bank, the Leeds and the West Bromwich Building Society are among other lenders who have cut rates since the EU referendum….
These are the kind of rates that borrowers couldn’t have dreamt of getting even two years ago,’ said Ray Boulger of John Charcol.
The 10-year fix from the Coventry will cost borrowers 2.39%, but to get that rate, homeowners will only be able to borrow half the value of the property. In other words, the deal has a 50% loan-to-value ratio.
A mixed signal, then. A cashed-up borrower, able to put 50% down on a home, can finance the rest at some of the lowest rates ever. Clearly a borrower who can make a 50% down payment isn’t a credit risk. The low rate, then, is not the sort of thing that will be widely available.
But it’s worth keeping in mind that what happens in London’s high-end property market (catering to foreign investors) and what happens in London’s commercial property market (catering to developers) is probably a lot different than what happens in the normal property market for normal people making mostly rational financial decisions.
Affordability is all about your ability to pay back your mortgage. Being able to borrow more, or paying less to borrow, isn’t (at least in my book) a fundamental improvement in house price affordability. But it can be a powerful incentive.
As I said, the signals are mixed. The trouble in the open-ended property fund sector spread yesterday. More funds suspended redemptions. You have a supposedly liquid investment vehicle (the fund) secured by an illiquid asset (commercial real estate). The only way to meet redemptions (short of borrowing money and increasing leverage) is to sell (if you can) an illiquid asset.
Selling begets selling. Selling begets falling prices. Falling prices beget panic. Panic begets more selling. A doom loop.
But you have two different emerging property stories, then. One is the real world, where people buy homes as part of a long-term financial plan. The other is the financial world, where speculators and investors try to take advantage of capital flows and low rates. The City’s experience of Brexit thus far is not good. For cashed-up borrowers or those who can refinance an existing mortgage, maybe not so bad.
Category: Market updates