Housebuilders welcome interest rate cuts

August 4, 2016 / Isla MacFarlane
Housebuilders welcome interest rate cuts

As expected, the Bank of England today (4 August) halved interest rates to a new historic low of 0.25%, dashing savers’ hopes after seven years of ultralow rates. Experts say they are unlikely to rise again before the end of the decade. This is a mixed blessing for housebuilders, who will benefit from a surge in demand and cheaper borrowing costs but will suffer if banks become shy about dishing out bargain loans.

Overall, there is a relief that the decision has been made. “We welcome the Bank of England’s policy on reducing interest rates as it helps promote stability in the housebuilding sector and stability and confidence is exactly what the sector needs at this moment in time,” said Gwyn Roberts HQM Project Lead.

However, there is an element of unchartered territory as interest rates have never seen zero this closely before. When interest rates were slashed in 2009, it signaled a state of emergency. “Rates haven’t been touched since 2009 and focus has instead been on pumping cash into the economy,” said Nikolas Xenofontos, director of risk at easyMarkets. “Cheap money pushed up inflation which gave a boost to both the stock market and property prices. Now with this change in tactic, we may see property prices come under pressure.”

Either way, demand for property is likely to intensify, whether it is driven by cheap mortgages, a weaker pound or falling prices. This is all good news for housebuilders.

“Lower interest rates are also good news for the UK’s construction industry, as lower borrowing costs can spur developers on to build more,” said Ray Withers CEO of Property Frontiers. “This in turn creates more opportunities for off plan property investment, so lower interest rates benefit investors too.”

However much the market may have altered since that red letter day in June, the UK’s undersupply of housing remains as prominent as before. “The UK continues to have a severe housing shortfall, meaning demand for new homes is set to remain strong for years,” said Withers.

One sector that may be cheering louder that others is the build-to-rent market. “Strong demand and an interest rate cut are a great combination for buy-to-let property investors,” said Withers. “While interest rates have gone down, yields have remained the same, meaning that the buy-to-let profit margin has effectively gone up overnight.”

The sector may seem all the more appealing when the impact on savings is taken into account, as dormant capital is unlikely to gather anything more than dust for the foreseeable future.

“The other aspect of the rate cut to consider is that investing in UK property is now more attractive when compared with other asset classes,” said Withers. “Bonds and savings, for example, could both become less appealing as a result of lower interest rates, so it wouldn’t be surprising to see investors looking to release cash from those asset classes in order to use it for more profitable ventures, like buy-to-let property.”

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