Is it really true that an increase in interest rates would stop house prices rising?

Is it really true that an increase in interest rates would stop house prices rising?

We keep hearing that interest rates are going to rise soon and that somehow this is going to stop the seemingly never-ending increase in house prices. As interest rates have been at an all-time low for five years, it’s been believed that this has been one of the key factors which has led to the property price boom. Recently, the Governor of the Bank of England Mark Carney’s been dropping quite a lot of hints that interest rates will rise sooner rather than later. This is because apparently the economy’s picking up (forecasts say the UK economy’s expected to grow by three percent next year). He’s also hinted that he’s concerned about a “bubble” forming – although Zoopla boss  Alex Chesterman  recently said that this claim is not grounded in reality. Carney said that interest rates will rise to the new “normal” of 2.5 percent by 2017 – and along with the Mortgage Market Review (MMR) regulations, borrowing is set to become more difficult.

However, is it really a given that if interest rates rise house prices will stagnate? Well, this would surely be true IF the boom were based on cheap credit alone. It seems that there are a number of other factors to consider – which are outlined below:

Planning laws

For a long time now developers, politicians, pundits and experts have been grumbling about planning laws. With investors holding onto land to increase its value and onerous regulation stopping land being built on, there is nowhere near enough property to meet growing demand. And when property is scarce, waddya know – price start to rise. However, in the March Budget the government outlined its wishes to increase the supply of new-builds and to “Get Britain Building” as they put it (don’t politicians just LOVE their slogans???) As the population soars – with the prediction that they’ll be some one million extra people in London in fifteen years’ time – if the housing stock isn’t ready this could cause serious problems. The Queen’s Speech outlined plan to get applications through without the need for council approval and to also build garden cities. Small house builders will get support and they will be a Right to Build scheme, similar to that on the continent, introduced.

Overseas Investors

Rich foreign buyers have been snapping up property in the UK for a while now and it’s certainly kept property prices in Prime London high. This is because in comparison to many other countries the UK is a fair bet – with its strong legal system and political stability. Apparently some 70 percent of new-builds are being purchased by overseas investors – many of which are off-plan. As from next April, however, these investors will have to pay Capital Gains Tax (CGT).  Although this is unlikely to stop foreign buyers purchasing property altogether, reports are that property at the high-end has levelled out in terms of prices. This is also likely to be due to uncertainty in the face of next year’s General Election and not necessarily linked to an increase in interest rates, which would realistically make little difference to cash buyers. London is also a very competitive market in comparison with other international cities such as Hong Kong, Tokyo and New York – a recent survey found the city boasts more dollar millionaires than any of its competitors.

Economic benefits

Post-2008, after the worst recession since the Wall Street Crash in 1929, the UK has done pretty well recovery-wise in comparison to its European counterparts. More and more people want to live in London as the jobs market improves, with the added bonus of the growing expansion of housing developments and infrastructure such as Crossrail. The fact is London is one of the best cities in the world and in comparison to the alternatives it’s still easier than other places if you’re ambitious and looking to set up a business or find a job. This international appeal is what keeps it relevant and fresh and is why property will always, in the long-term, remain desirable.

Interest rate increases could well initially lead to a slowdown in house prices. However, there are clearly other factors to consider and it’s important to remember that in a city as diverse and as attractive as London property will always be a good investment.