Interest rates down to 0.5% – What does this mean for Property Investment?
The Bank of England today took the widely expected, but even so historic, step of slashing interest rates by 50% – down to a record low 0.5%.
But more interesting and significant is the announcement that the BoE will begin so-called quantitative easing, better known as printing money.
This is really taking the UK economy into unchartered waters and there is no doubt the world will be watching to see how this voyage of discovery turns out.
The plan is to pump an initial £75 billion of a possible £150 billion into the economy, essentially to start money flowing through the economy’s veins again. It is a desperate measure by any standards and has been brought about by desperate times.
Will it lead to a huge rise in inflation? Almost certainly not.
Of course, some inflation is the specific purpose of the exercise. Too much would be a disaster – although less so than a spiral of deflation.
The fact is that extra product, whether its money or anything else is only inflationary if there is insufficient demand. Right now the UK economy is starved of credit, especially credit to businesses, so insufficient demand and a sudden flood of cheap credit hitting the economy and causing a sudden leap in inflation seems an unlikely combination.
Wooing the fearful consumer to spend may be the hardest challenge. Unemployment is shooting up and consumer confidence has fallen off a cliff. Who will borrow and spend if they genuinely fear they will lose their job?
Monitoring the effects of the cash injection will be key and the bank will be ready to reverse the cash injection if needed. The real worry is that this is pretty much the last bullet in the bank’s gun – apart from pumping in more money.
Quite how the new money will be injected into the economy isn’t yet clear, although it has been widely speculated previously that the BoE will buy the UK government’s debt in the form of gilts from banks and other institutions. That liquidity, it is hoped, will then be lent out by those same banks and institutions and the wheels of the credit machine will gradually groan back into life again.
So far in this crisis, where the UK has gone first, others have tended to follow. The eurozone cannot take the measures the BoE has announced today, perhaps this has been the reason it has been slower to cut rates: it needs some ammunition in reserve.
What is clear, or at least what is becoming clearer, is that rate cuts alone are not going to persuade fearful banks to return to business that is anything like normal. Other measures are needed and the UK’s BoE has taken the bold step of deploying them.
But what does all this mean for the UK’s battered property market?
For those who have cash, there is no where to put it. Stocks and shares? and hope the bottom is near, that the whole lot isn’t lost, stick it in a bank and pay them to keep it for you and not pay you interest . Of course, you can buy gold, sure. But gold is only a hedge and you will need to be ready to switch into a longer-term asset when the clouds clear.
OR it can be invested in property bargains for the long-term.
That is why we are seeing an ever increasing number of investors coming to us looking for high yielding rental property – property that is off its peak price of a couple of years ago by a great deal more than the property price indices reveal the average falls to be.
People are bargain hunting, in other words.
No one has a clue – despite what they might say – about when we will see strong capital growth again in the UK property market.
It will depend directly on the performance of the UK economy and how well it manages its rebalancing act. It shouldn’t be written off in a hurry, that’s for sure.
All this leaves the investor surrounded by a great deal of uncertainty. The answer, is to protect yourself as far as possible from the potential worst case scenarios.
Once upon a time – in what seems like a different age – the hunt was all about high capital growth in property investment.
The property investment strategy for today has completely changed. The search is no longer for capital growth but rental yield.
This is why so many investors are looking at rental yield. Rental Yield is a great protector. It allows an investor to take an income stream at best and at worst it should allow an investment to cash flow itself – be so-called cash flow neutral.
A High rental yield means an investor can, essentially, fire and forget – they put their money down, sit back and wait for growth to return to the market, whenever that may be.
CLIFFTONS Estate agents cover the whole Bournemouth property market, dealing with repossessions in Bournemouth, investment properties, HMO properties and tenanted properties. Combining this with an active Letting agent department means we can offer an exemplary service.
CLIFFTONS is an independent Estate & Letting agency in Bournemouth and now is a great time to buy property.
Posted: 5th March 2009