Letter from London: Rates are rising in the US but the picture is more complex in the UK

Rates are rising in the US but the picture is more complex in the UK. We discuss the implications for the prime London property market.
2 minutes to read
Categories: UK London

The Bank of England looks increasingly likely to follow the Fed and raise rates, possibly this year.

What does that mean for the prime London property market? In simple terms, it means any upwards pressure on mortgage rates may intensify and investors could look longer and harder at other asset classes.

However, to put any UK rise in context, it should be noted that rates will initially climb back to 0.5%, which is where they were before the EU referendum, and will remain ultra-low by historical standards.

There are several distinctions between the positions of the UK and US.

The first is Brexit. The Bank of England will require more clarity around the economic implications of leaving the EU before any normalisation of rates.

Furthermore, wage growth remains relatively subdued, which will act as a brake on inflation, and economic indicators like new cars sales remain sufficiently weak to suggest a hawkish monetary stance is less likely.

All of these factors combine to suggest that generating income will remain challenging for investors and the higher returns available in residential property will look attractive by comparison.

However, for dollar-denominated investors looking at the trajectory of sterling and waiting for the opportune moment to buy, it looks like an increasingly high-risk strategy. The pound was trading at around $1.35 at the end of September compared to $1.21 in mid-January.

Meanwhile, demand and transaction volumes in the prime London market have improved steadily this year as asking prices come down to factor in higher transaction taxes, although the scale of these rises is not uniform across all markets. 

There are also differences across price bands and higher-value properties outperformed lower-value properties for the sixth consecutive month in August as the market adapted to the changed fiscal landscape. 

Prices between £5 million and £10 million declined 3.7% in the year to August 2017 compared to a fall of 5.4% across the whole PCL market, and a drop of 6.7% between £1 million and £2 million. 

The last time there was a similar pattern was during the initial stages of the global financial crisis in 2009, when the safe haven appeal of the prime London residential market rose sharply.