As anticipated, the Bank of England has now cut the interest rates in half to a new historic low of 0.25%, shattering the hopes of savers after a seven-year period of already ultralow rates at 0.50%. It is now expected that prospect of interest rates rising again before the end of the decade is somewhat doubtful. However, this could be a blessing for housebuilders, who will take advantage from a boost in demand and reduced borrowing.
In general, it is comforting that the decision has finally been made and has ended months of uncertainty. We believe that the reduction of the interest rate is beneficial as it will help to strengthen the housebuilding market, and stability and certainty is precisely what we believe the market needs at this time whilst the economy adjusts to leaving the EU.
However, we are now in unchartered territory as interest rates have never been this close to zero before. The last time that interest rates were lowered in 2009, it indicated a state of emergency. Rates were unchanged since then and the focus had instead been on quantitative easing. Cheap money in the economy has driven up inflation which bolstered the stock market and property prices.
Following the changes, it seems demand for property will escalate, whether it is propelled by cheaper mortgages, a weaker pound, falling prices or all three. This is all good news for housebuilders.
We believe that lower interest rates will also be welcomed by the construction industry, as reduced borrowing costs will entice developers. This will in turn lead to a greater abundance of opportunities for off-plan property investment, so lower interest rates benefit investors too. All of this will combine with the UK’s chronic housing shortage to create a fantastic environment for property developers.
The build-to-rent market is also looking buoyant following the cut. Strengthened demand and lower interest rates are an ideal combination for buy-to-let property investors. Even though yields have remained static, the drop in the interest rate means that the buy-to-let profit margin has effectively risen overnight.
Another aspect of the rate cut which developers should consider is that investing in UK property is now even more attractive when compared with other types of assets. Bonds and savings could both become less appealing as a result of the cut in interest rates, therefore it would not come as a surprise to see investors looking to release cash from those assets in order to reallocate their resources into more profitable ventures, such as buy-to-let property.