By Dr Anandadeep Mandal
Birmingham Business School, University of Birmingham
In September 2024, the Bank of England (BoE) made the strategic decision to maintain its base interest rate at 5.25%. This move follows a series of interest rate hikes in response to inflationary pressures throughout 2023 and early 2024. The decision to pause further rate increases marks a critical moment for many sectors of the UK economy, particularly the real estate market, which is highly sensitive to interest rate fluctuations.
This blog explores the potential impact of the Bank of England’s decision to hold its base rate steady, examining its effect on residential, commercial, and investment real estate sectors across the UK.
Residential Property Market
The Bank of England’s base rate significantly influences mortgage rates, as lenders typically adjust their rates in response to changes in the base rate. By maintaining the base rate, the BoE aims to stabilise borrowing costs in the housing market. For homeowners, buyers, and investors, this decision has both short-term and long-term implications.
- Mortgage Rates and Homebuyers
The cost of borrowing for potential homebuyers has already risen over the past two years as the BoE incrementally increased the base rate from its pandemic-era lows. While the September decision halts further rate increases, the base rate remains at its highest level in 15 years. As a result, homebuyers continue to face relatively high mortgage rates compared to the previous decade, with standard variable and fixed-rate mortgages reflecting these elevated levels.
For first-time buyers, the situation remains challenging. Higher mortgage rates mean larger monthly payments, effectively reducing affordability in the housing market. Many potential buyers may find themselves priced out or forced to delay their plans to purchase a property. On the other hand, the decision to pause further increases could provide some relief and a sense of stability, allowing buyers to plan their purchases with more certainty.
- Impact on House Prices
The sustained higher cost of borrowing is likely to continue exerting downward pressure on house prices. In recent months, house prices in certain areas have begun to cool, especially in regions where affordability was already stretched, such as London and the Southeast. The BoE’s decision to hold the rate may prevent a sharp correction, but experts predict that house price growth will remain subdued in the short to medium term.
A slowdown in price growth, coupled with higher borrowing costs, could shift the balance of power from sellers to buyers, creating more opportunities for negotiation. However, the continued affordability challenge will limit the pool of potential buyers, particularly in higher-priced markets.
The Buy-to-Let Market
The buy-to-let sector, which has been an attractive investment vehicle for many landlords in the past, is also feeling the effects of higher interest rates. Landlords who have mortgages tied to the base rate or are on variable-rate deals have seen their costs increase, squeezing profitability. The BoE’s decision to hold the rate will likely mean that these higher costs persist.
- Profitability for Landlords
Landlords may find themselves passing on these higher costs to tenants in the form of rent increases, which could exacerbate affordability issues in the rental market. However, there are limits to how much rents can rise before becoming unaffordable, particularly in areas where wages have not kept pace with inflation. As a result, some landlords may choose to exit the market altogether, potentially leading to a reduction in the supply of rental properties.
- Opportunities for New Investors
For potential new investors in the buy-to-let market, the BoE’s decision provides a mixed picture. On the one hand, higher borrowing costs make financing new purchases less attractive. On the other hand, if house prices continue to stagnate or decline, some investors may see this as an opportunity to acquire properties at more reasonable prices. New investors will need to carefully weigh the risks of higher interest rates against potential returns in the current market environment.
- Commercial Real Estate
The impact of the BoE’s base rate decision extends beyond the residential market, with commercial real estate also feeling the effects of interest rate policies. Commercial property, including office spaces, retail units, and industrial properties, is highly sensitive to macroeconomic conditions, and higher borrowing costs can have significant repercussions.
Borrowing Costs and Investment
Commercial real estate developers and investors often rely on loans to finance new projects or acquisitions. The BoE’s base rate pause provides some respite from further increases in borrowing costs, but the existing high rates continue to challenge the sector. Higher financing costs have led to a slowdown in new developments, particularly in speculative projects where future returns are uncertain.
Investors are likely to adopt a more cautious approach, focusing on prime locations and properties with secure, long-term tenants. As a result, secondary and tertiary commercial properties may struggle to attract investment, potentially leading to a stagnation in less sought-after locations.
- Tenant Demand
Tenant demand for office and retail spaces has also been affected by broader economic conditions, including inflation and the shift towards remote working. Many businesses are reevaluating their need for physical office spaces, leading to an oversupply in some markets. While the BoE’s decision to maintain the base rate may help stabilise the commercial property sector, demand is likely to remain subdued, particularly in the office segment.
Outlook for Real Estate Investors
For real estate investors, the BoE’s decision to maintain its base rate offers a moment of relative stability but with ongoing challenges. Investors in both residential and commercial real estate will need to navigate an environment of higher borrowing costs and subdued price growth. Careful consideration of financing options, location, and long-term demand trends will be crucial in maximising returns.
Additionally, the broader economic environment, including inflation and wage growth, will continue to influence the real estate market. Investors should remain vigilant, monitoring future decisions from the BoE and broader economic indicators to adjust their strategies accordingly.
Conclusion
The BoE’s decision to hold its base rate at 5.25% in September 2024 reflects a cautious approach to balancing inflation control with economic stability. While the decision offers some relief from further rate hikes, the real estate market—particularly residential and commercial sectors—remains constrained by higher borrowing costs and affordability challenges. Buyers, landlords, and investors will need to adopt a strategic, long-term perspective as the market adjusts to the new normal of elevated interest rates and slower growth.
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The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.