Stakeholders should not make the mistake of assuming that the upper echelons of the market will be insulated from its effects.
The twin upheavals of spiralling inflation and rising interest rates, and the likely resultant recession, will do more than squeeze household budgets, and lenders should be awake to how this could influence the shape and direction of the real estate market.
Conversely, the recently announced stamp duty cuts will likely breathe more life into an already buoyant property market.
Highs and lows of the market
The UK property sector has been extremely active for the past two years. This can be attributed to numerous ‘intangible’ factors, such as global reputation and prestige, but in simple financial terms comes to a notable imbalance of demand and supply, coupled with the relatively low cost of borrowing.
This is best exemplified in London’s prime property market, where demand is resurgent after international investment was stymied during the pandemic. At the time, Prime Central London (PCL) had enjoyed only modest growth relative to the spread of what was being seen nationally. But PCL has since performed remarkably, due to returning demand and a continuity of limited supply.
The latest Office for National Statistics house price index showed that prices increased by 15.5 per cent in the year to July 2022.
While this figure is weighted slightly by the moderate quieting of growth in 2021 immediately following the removal of the Stamp Duty Land Tax holiday, it does indicate the impressive performance of the property market amid speculation that it would “cool down”.
New economic climate
So, what must we now consider to account for rising interest rates and inflation?
Interest rates could not remain historically low, as they had been for a significant time. Whether due to economic policy from the government of the day, or, as has happened, in response to a fiscal emergency, it would always be the case that eventually the cost of borrowing would rise.
Few within the sector are panicked by this – the modern industry offers such a wide range of products that minor percentage increases to the long-term cost of borrowing is unlikely to dissuade high-net-worth individuals from accessing the market, or increasing their portfolio. We only need to compare the current base rate to what was seen in the 1990s and early 2000s to know that borrowing is far cheaper than has typically been the norm.
The watchword for lenders when dealing with brokers and investors will be variety. Higher base rates mean that lenders will have to adapt to become more competitive – particularly if aggregate demand is depressed over the next year.
Becoming flexible
The wider lending industry will, I suspect, also be minded to take a leaf out of the alternative finance sector’s book, offering greater tailoring to individuals and more flexibility where affordability is concerned. Rigid structures for assessing client needs and working with brokers are often ill-suited to more turbulent climates like the ones we are currently experiencing.
Refinancing products, longer-term fixed rates, short-term loans – different brokers and borrowers will be seeking a wide range of options to help them navigate the property market amid rising rates and inflation. Open dialogue is, therefore, very important.
While there is uncertainty on the scale of the impact on the upper end of the market, it is certain that communication with clients and prospective borrowers will be key.
Today, the sector has more plates spinning in the air than even in the frenetic early-pandemic period – and so it is crucial that lenders and borrowers work closely to keep the market moving in a positive direction.
