Our Managing Director, Alastair Hoyne shares his thoughts on the Bank of England's latest decision to raise interest rates to 1.25%.
Better late than never. The warning signs have been there for a while now. Yet of course the Bank of England remains reactive instead of proactive.
Ripping off the band aid with a more immediate increase in rates might actually help stave off a recession and shock the system into easing back. A gradual increase has the opposite effect in my opinion, a recession ends up a 'self-fulfilling prophecy' as the papers have more time to discuss the doom and gloom and inflation has more time to bite, thus ending up creating our own misery.
A rising rate is meant to reduce inflation, and get people to save more. However petrol prices are still increasing at the pump. Goods and services are increasing. It's almost an excuse for people to raise prices so that the few can offset the coming drop in production and purchasing.
What I find most interesting though is that while quantitative easing may have been rescinded centrally, banks and other property lenders are certainly not willing to give up their gravy train. Short term property lenders are dropping rates and increasing gearing. From 75% LTV on the purchase price to 85% on the Open Market Value, with rates dropping from 0.75% down to 0.69%. All the same the long term lenders, while they are passing on the rate increases immediately they are also increasing gearing, most noticeably with commercial lending, going from 65% up to 70% at a number of lenders.
They are creating their own synthetic quantitative easing package because they don't want to stop lending nor property investors to stop borrowing. All the while property prices are at or near their peak and further borrowing right now has a devasting potential consequence if house prices do start to drop as a result of households that have to sell quickly. Customers will end up in negative equity, further reinforced with the loss of purchasing power as a result of inflation.
I'm recommending clients buy, refurbish and sell cheaper properties to build a war chest for the coming foreclosure rush, to buy up higher yielding properties that are likely to ride any recession due to having professional tenants whose salaries have inflation protection clauses.
If not it might just be best to sit on their hands, while waiting for a bargain (at the unfortunate expense of someone else's misery).
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