Rise in interests rates has housebuilders on edge

For many, historically low interest rates set the rung low enough for first time buyers to step onto the housing ladder and reassured housebuilders that if they built them, buyers would come.

Now, following the steady growth of the UK economy over the summer months, the Bank of England has increased the base rate of interest to 0.75% – the highest it has been in nearly a decade.

The news hardly comes as a surprise. A rise in interest rates has been on the cards for many months, however rising inflation coupled with stagnant economic growth early in 2018 meant the decision was put on hold until now.

“A rise in rates will no doubt set some panic alarms ringing in the industry, but let’s face it, we all knew they were coming eventually,” said Gary Silver, director of Dorchester Regeneration. “I still think the biggest issue we need to deal with is the affordability of new homes, because that will most likely remain the biggest barrier to people buying. If, as a developer, you are building homes that are considered affordable for your audience, that are of a high quality and meet the local demand, then a rise in rates is unlikely to deter most purchasers.”

However, it isn’t just the cost to the buyer that could be detrimental. Parul Scampion, Chief Operating Officer of Fruition Properties, explained, “As a developer, the cost of our debt is linked to the BOE base rate so any rise will have ramifications when borrowing for construction and to buy land. This will have more of an impact for SME developers where lending is sought for each individual project rather than being funded from the business’ own reserves.

“If this interest rate rise is part of a wider governmental policy to normalise rates post-2008, this will have to be taken into account by both developers and vendors for future acquisitions. It may also have more of an impact on those coming to the end of a fixed product, especially investors who will have to contend with the double squeeze of additional interest costs and lost mortgage interest relief. This could result in stock coming back to be sold in what is an already weak market.”

It seems everyone had enjoyed a period of dead flat, ultra-low interest rates, unprecedented in modern times. However, the good times couldn’t last forever. “Base rate rises are rarely good news for property values but this increase is particularly significant for markets which have become chronically addicted to cheap money,” said Chief Executive of Hampshire Trust Bank, Matthew Wyles. “The monetary authorities need to stand back for a sustained period to understand the impact of what they have done before piling on any more pain.

“This rate rise lands on a subdued housing market where, in some parts of the country, prices are still below their 2007 peak. Property investors in London and the South East, already suffering from the impact Stamp Duty hikes and buy to let taxes, are unlikely to find anything in this announcement to brighten their mood. Uncertainty around the outcome of the Brexit negotiations completes the darkening picture.”