27 June 2011

The Monetary Policy Committee (MPC) meeting minutes released on 22nd June show that officials voted 7-2 to hold interest rates steady in response to recent weak economic data. The Confederation of British Industry said on June 23, that one UK retail-sales index had fallen to its lowest level in a year this month, as Britons curtailed spending on groceries and clothing.

How long interest rates can remain at a historical low is anyone’s guess. According to Tullett Prebon Plc data, investors have now pushed back bets that the Bank of England will increase interest rates to beyond May 2012. But change may come sooner; the Bank for International Settlements (BIS) has recently warned that low interest rates across the globe are a threat to world financial stability.

The BIS warn that low cost of borrowing has resulted in a credit and property price boom that is fuelling inflation, especially in emerging markets, “tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” it says.

What is the impact of a rising inflation rate on rentals in the short to medium term?

Our analysis and research show that rents are already on the rise. Strong tenant demand continues to come from first-time buyers who struggle to raise the substantial deposits.

If inflation rises further, rents will increase in tandem. Historically rents over the last 15 years have not increased in comparison to house prices and a correction is long overdue. It is almost certain we will see rents increase at a rate greater than 5%.

If the Bank of England decides to raise interest rates to counter inflationary pressures, this will have a negative impact on the cash outflow of landlords but more than likely have a positive impact on the cash inflow.

Rising Interest rates and high inflation will deter even more first time buyers from buying property as their disposable income is reduced fuelling further demand for rental accommodation.

Young professionals who make up a large part of the rental market prefer to be flexible in an uncertain market. This will encourage more professionals to house share further. A survey commissioned by the Halifax has found that 46% of people aged between 20 and 45 think the UK is becoming more like Europe and that renting rather than buying will soon become the norm. The insatiable demand for rented accommodation has even resulted in tenants gazumping one another.

-Ying Tan, Managing Director, The Buy to Let Business Limited