The results of this policy have been mixed across the property market to say the least. Established homeowners, buy-to-let landlords and even those on the edge of losing their homes have been big winners. On the flip side, renters, prospective first time buyers, and savers have all suffered on the back of almost four years of rock-bottom rates.
Rates were cut rapidly to their current level. From October 2008, the Bank of England set about a sharp set of cuts that took the base rate from 4.5% to 1.5% by the end of the year. Less than six months later, in March 2009, the Bank rate hit its current all-time low of 0.5%.
As a result, standard variable, tracker and rates on new fixed rate mortgages both started to dive at the close of 2008. According to the CML, the average interest rate in September 2008 across all mortgage types, stood at 6.11%. By April 2009, this had fallen to 4.30%, and it stood at 3.7% in November. This drop has played into the hands of established homeowners with significant equity, who have enjoyed the very cheapest rates as well as the support the low interest rates have provided for house prices.
However, for owner-occupiers on the brink as a result of the recession, falling rates have been even more welcome. Thanks to historically low payments, many struggling borrowers have been given the financial breathing space they need to put their finances in order. This has kept a lid on the number of arrears cases since the recession, which otherwise would have been significantly higher without the Bank’s decision to drop rates. For instance, the number of mortgages with arrears of more than 2.5% appears to have peaked during this recession at 199,600 in 2009, compared to 425,200 in the wake of the last recession.
As a result, the repossessions level has remained remarkably low. Although they peaked in 2009 at 48,900, this is just 65% of the level of 1991 when 75,500 properties were repossessed in just one year. In fact, the latest annual data shows repossessions fell to 37,300 in 2011, and we expect another fall in 2012 – to 34,000.
This comes despite a number of headwinds. The jobs market has held up better than many commentators feared in 2008, but between 2008 and 2011 the number of unemployed increased by 780,000. Even for those in work, the current climate means sluggish pay growth is being eroded by high levels of inflation.
One knock on effect of the low rates preventing higher repossessions has been to reduce the number of forced sales, which in turn has reduced supply and supported house prices. While good news for homeowners, prospective first time buyers, also hit by the reduced availability of high LTV mortgages, have had to save for longer to secure their first home.
This difficulty has been compounded by meagre savings rates caused by the low Bank rate, which have been outstripped by inflation. Most recently, Funding for Lending is accentuating this problem further, causing saving rates to fall even further.
The cumulative impact of these factors has been to drive more prospective buyers into the rental market and the resulting competition has pushed up rents. Our latest Buy to Let Index shows the average rent in England and Wales now stand at £734, compared to £642 in January 2008. This is a 14% increase over four years – or average rental inflation of 3.4% each year. In turn, these near-record rents are now proving another barrier to raising a deposit.
On the converse, landlords have been beneficiaries of the environment created by record low interest rates. Increased demand has led to high rents and low void rates – plus the historically low mortgage rates on offer as a result of four years of a low Bank Rate. Landlords typically fall into the category of low LTV borrowers – and have access to the best mortgage rates that established owner-occupiers are enjoying. Average yields currently stand at 5.4% – compared to 4.2% in January 2008, following the start of the financial crisis.
None of the major city forecasters predict a rise in the base rate before the end of the year; making half a decade at half of one percent not only possible, but probable. The Bank of England’s intervention will be studied for many decades to come, but its impact on individuals in the housing market has been profound, and dependent on an individual’s financial circumstances. While mortgage holders will be hoping for rates to remain on the bottom for four more years, renters looking to save deposits will be hoping the MPC breaks the status quo in the foreseeable future.
