Why an Interest Rate Rise Could Push Up Rents

On the eve of a potential interest rate rise, the Landbay Rental Index, powered by MIAC, looks at how an increase in the base rate could push up rents.

In the 15 months since the Monetary Policy Committee (MPC) voted to cut the base rate from 0.5% to a new record low of 0.25%, private rent prices have grown by less than 1% (0.94%). This compares to house price growth of 5% over the same period.

But, as the Bank of England (BoE) prepares for what many expect to be the first interest rate rise in a decade, this historic decision could prove to be the starting gun for a more rapid increase in rents, Landbay believes.

Why an Interest Rate Rise Could Push Up Rents

Why an Interest Rate Rise Could Push Up Rents

The buy-to-let sector has faced a number of tax and regulatory changes over the past two years, which have put pressure on landlords to increase rents. A rise in Stamp Duty for additional homes in April 2016, the reduction in mortgage interest tax relief from April 2017, and tighter lending criteria from the Prudential Regulation Authority (PRA) in January and October 2017, have pushed up costs for investors.

Many expected these higher charges to be passed onto tenants, but last year’s base rate cut to 0.25% relieved some of this pressure through record low mortgage rates.

Growth in rent prices since the August 2016 base rate cut has consequently been relatively modest, rising by 0.94% across the UK, or 1.97% excluding London, which has seen rents drop by 0.95% over the 15-month period.

The East Midlands (3.13%), East of England (2.76%), West Midlands (2.53%), and South West (2.43%) have all led this growth but, with mortgage rates likely to increase soon after an interest rate rise, it is more likely that rent price growth will accelerate in the coming months.

Meanwhile, house prices have increased by an average of 5% since the base rate cut last year – more than five times the pace of rent price growth. House prices have historically grown faster than rents, but the disparity has been accentuated by a comparatively supportive approach to housing policy for first time buyers.

The Help to Buy ISA and Shared Ownership scheme, along with investment in Right to Buy and Starter Homes, have subsidised housing costs for first time buyers, and, in the absence of significant housebuilding, pushed up house prices. If an interest rate rise does push up mortgage rates, then some of this demand will disappear, and house price growth is likely to soften as a result.

The CEO and Founder of Landbay, John Goodall, comments: “Landlords have had to face a catalogue of challenges over the past couple of years, from stricter regulation, reductions to tax relief, and a significant Stamp Duty tax hike when buying a buy-to-let property. Yet, despite these pressures, there has been little sign of them passing on these costs to tenants in the form of higher rents. Record low mortgage rates have enabled them to absorb some of the costs, especially those that are wary of tenants facing negative net wage growth, so a base rate rise could make all the difference.

“A 0.25% uplift might seem small, but the message it would give to the markets, of monetary policy normalisation, could spook landlords, especially those embarking on long-term tenancies. In and of itself, a quarter of a percent is not going to have a huge impact on rental prices overnight, but symbolically it has the power to galvanise landlords to price in many of the tax and regulatory changes that have been building up for some time now.”

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