Interest rates are always a key factor in how the property market performs. While low interest rates have been with us for some time the possibility that the Bank of England base rate could turn negative is now an extra factor to consider. In this post we will look at what a negative interest rate could mean for the property market and investment it in.
Although it has been talked about for a while, the idea of introducing a negative interest rate came to the fore again following the Bank of England’s Monetary Policy Committee meeting last week. While keeping interest rates on hold at 0.1% the Bank of England suggested that the banks were on six month’s notice to prepare for the possibility of negative interest rates. They stressed a cut was not imminent, however.
Governor of the Bank of England, Andrew Bailey, has previously said negative interest rates could be a useful economic tool – but that implementing them could be problematic.
How exactly would negative interest rates work?
As it would be an unprecedented situation it’s difficult to know how they would be brought in. Some countries which have adopted this policy actually have a negative rate. In Japan it is -0.1% and Switzerland -0.75%. While Norway, Sweden and the Eurozone have 0%. Some experts suggest that in the UK, for largely technical reasons, either 0% or a peppercorn interest rate might be more likely than an actual negative rate.
What will negative interest rates mean for banks?
Negative interest rates will mean banks will effectively have to pay to keep their money on deposit. So they may not be so keen to hold deposits, but become much keener to lend it out.
What will negative interest rates mean for borrowers?
Exciting though it is, the prospect of being able to borrow money for free (or even being paid to do it) are not very likely. Borrowers could in theory see a very small reduction in borrowing costs. But many experts believe today’s historic low loan and mortgage rates will not change much. Some suggest banks may need to actually increase the cost of borrowing to cover the cost to them of a negative interest rate.
In Denmark, however, it is possible to get a negative interest rate mortgage.
It should, however, mean it will still be possible to borrow money cheaply for some time yet. Banks may be keener to lend and may even loosen their lending policies.
What will negative interest rates mean for savers?
Savings rates will almost certainly reduce even further from today’s negligible rates, quite conceivably to 0%.
Although negative interest rates suggest savers will have to pay to save their money many commentators also suggest this is unlikely. It’s possible, however, that some people with large bank deposits may have to pay to keep them there. This happens in both Switzerland and Germany for example – where ‘cash under the mattress’ savings have apparently become more popular as a result.
Now to look at the really interesting issue – what impact negative interest rates could have on the property market.
Home buyers could find it even easier and certainly no more expensive to mortgage or remortgage than it is now. Investors will find it easy and cheap to borrow money too. That could encourage more people to buy, move and invest.
Anyone with cash to invest could very well be tempted into the property market, some for the first time. Even a fairly modest 5% annual rental yield should prove extremely attractive compared to 0% in a savings account. (Or, for those with a lot of cash, the prospect of actually paying to save it in the bank.)
Bear in mind that many current forecasts suggest property prices will start rising next year, after a stagnant 2021, in any case. So a 5% annual letting yield plus a 1-2% annual capital gain could make property a very attractive investment over the coming years.
It’s not unlikely that negative interest rates could keep the property market buoyant, or even fuel another boom, over the next few years. Wrong though it might seem, negative interest rates could actually have a positive impact on the property market.
So when could interest rates turn negative?
The Bank of England has suggested banks should begin to prepare in case it happens. No doubt many of them are doing so already. Upcoming meetings of the Bank’s Monetary Policy Committee are on 18 March, 6 May, 24 June, 5 August and 23 September. So, if it happens at all, late summer or early autumn could be possibilities.
Last but definitely not least it’s also not a given that interest rates will turn negative or even necessarily stay that low. There are many factors at play here. Much depends on what happens with Covid, and further furlough or income support measures, the economy and unemployment.
There are some commentators who suggest that if there’s an economic bounce back and inflation rises interest rates could actually go up not down. So it’s very much a case of watch this space!