As the Bank of England raised interest rates for the fourteenth consecutive time to 5.25 per cent, we ask what the fall-out may be for property prices, mortgages, and real estate investors.
In this new phase of the property market, some high street lenders are withdrawing products and average mortgage interest rates now stand at almost 6 per cent or more. How are these continuing pressures affecting UK property for buyers, sellers, and investors, now and in the foreseeable future?
Gary Edwards, Managing Director, Head of Credit Advisory, at HSBC Global Private Banking in the UK separates the headlines from the realities.
Where the gains outweigh the dips
Frontpage splashes have been forewarning of property crashes and negative equity, raising fears for the future – but are they well-founded? “When you focus on that dip on its own, it looks like a crash. But in the context of the last five years plus, it’s still on the up,” Edwards explains.
Edwards points out that prime central London is still an aspirational property location for his international clients: “The number of GBP5 million plus properties that we exchanged in London has gone up year-on-year since 2019 and has now nearly doubled. That proves it’s not a dead end or waning as an attractive location.
“Where mortgages are affordable for the individual, family or business, the property value can be slightly irrelevant during these current market conditions,” he says. “We have just completed our third mortgage valued at GBP50 million this year, so people are still buying ‘big’.”
Edwards believes the next two years for the UK property market will be decisive as a selection of fixed term rates end, and property owners enter a vastly different environment.
Edwards points to interest rate rises as being a destabilising influence on the wider UK property market. “The fallout needs to play out,” he says. “At HSBC Global Private Banking we need to make sure we are being supportive. The bank and its clients are not immune to the market. People have borrowed to buy big assets, with large mortgage costs.
“The financial regulator has stepped in to guide lenders on the levels of support customers and clients should expect during this difficult time. For a private bank such as ours, those levels of support are already embedded in our general working practices. Whilst our clients generally have the means and the wider asset base to sustain their position and emerge in good shape, we should not be complacent. The bedrock of a good borrower/lender relationship is communication.”
Some people will be thinking of selling properties because they are unaffordable, which is a good time for a banking partner like ourselves to step in and help those who have the means to invest. - Gary Edwards, Managing Director, Head of Credit Advisory, at HSBC Global Private Banking
The future for interest rates and equity
What if the Bank of England votes for a fourteenth rise to try and curb rising inflationary forces? “We are anticipating interest rates will continue to rise for the remainder of 2023 before they peter-off and stabilise,” explains Edwards.
He points out that once the UK market steadies, it will be possible to establish a new line of sight: “Some people will be thinking of selling properties because they are unaffordable, which is a good time for a banking partner like ourselves to step in and help those who have the means to invest.”
But what about fears of negative equity raising its head again? “If there is a situation of negative equity throughout the market - with people selling property at a distressed level - it drags the market down, it drags value down,” says Edwards.
“For clients with a portfolio of buy-to-lets, they could see the core value dip, so it’s important to make sure there is a sensible buffer in place, and affordability of the monthly payments. There is also a question of whether you are ‘opportunity ready’, such as releasing equity from a property or investment portfolio to enable you to be an opportunistic buyer.”
For individuals with significant investment portfolios, HSBC Global Private Banking can ensure that clients can seize opportunities when they see them, with the support of their Relationship Manager.
Advice for buy-to-lets
In the present market, unless rents can cover the mortgage costs it’s unadvisable to purchase a buy-to-let using debt, purely for the rental profit because yields have not caught up.
However, where a purchaser has other assets that can be used to offset rental shortfalls, it could still be a smart investment. Buyers should also assess their motivations behind the purchase, such as future proofing for their family.
Edwards cites examples of international buyers purchasing entire floors of flats off-plan as buy-to-lets, to create a revenue-returning asset as well a base for grandchildren coming to study in the UK.
There are multiple motivations to strategies like these, but it’s clear there is confidence in UK real estate as an asset class. When wealthy families are making these kinds of large purchases, it signifies a longer-term investment strategy rather than a short-sighted decision to make a profit and turn properties around.
What we want to do is protect our clients from the one-off hits: a change of regulation, or a jump in the margin, or a change in the FX rate. - Gary Edwards, Managing Director, Head of Credit Advisory, at HSBC Global Private Banking
What is your next move?
Edwards emphasises that now is the time for clients to reach out to their Relationship Managers: “A sound MOT or check-up of your entire financial circumstances is a must, and HSBC Global Private Bank can get a team together for you - investment experts, lending experts, wealth management experts and more.
“Looking at your investment portfolio as well as your property portfolio; have you got assets that naturally hedge each other? Or which complement each other? Do you need to rebalance your portfolio?”
Picking mortgage and lending products off-the-shelf means they are not curated for your circumstances. Family offices, individuals, and investors could be missing out on bespoke products that fit their needs.
“What we want to do is protect our clients from the one-off hits: a change of regulation, or a jump in the margin, or a change in the FX rate,” he says. “We can find solutions to problems if we know about them, early on. If you’ve got good holistic, well-rounded, well planned financial circumstances, you should be able to weather these storms and protect yourself.”
If you want to discuss your future property decisions or financial health in this current market, please speak with your Relationship Manager.