Mark Carney the governor of the Bank of England has attempted to push back expectations of interest rates rising by indicating that he is going to link rate rises to unemployment. He says that he wishes to give forward guidance by pledging to leave interest rates unchanged at rock bottom levels until unemployment falls below 7%. But he also said that even if unemployment did not fall below 7%, and inflation picked up significantly to the point of threatening financial stability, that this may force him to increase rates earlier.
This policy is a clear signal from the bank that they do not expect rates to rise until late 2016. Unfortunately the markets don’t believe the bank and are pencilling in rises to take place earlier in 2015. It is possible that they feel that unemployment will come down from the current 7.8% more quickly, or they feel that other events will take place to dash his hopes of keeping rates low for the next 3 years.
However, overall this statement from the governor is good news for borrowers. It potentially gives existing mortgage holders more time to get their houses in order and reduce debt. It also allows new credit worthy borrowers to access money in the near term at historically low rates, with lots of government goodies being thrown in from their Help to Buy scheme. This should help to sell a lot of houses in the next year or so and perhaps restore the feel good factor in the housing market just in time for the election in 2015.
Although these initiatives are good news for the housing market in general, they are perhaps not so beneficial for housing speculators as the governor has indicated that he is acutely aware of the risk of unsustainable credit, and is determined that a housing bubble will not form. Importantly, he now has the tools to contain risks in the housing market, and this means that if he sees prices rising at say much higher rates than inflation he may step in and restrict lending. His ability to do this could effectively apply the brakes to house price inflation. So hopefully it will bring more stability to the market, and ensuring as far as possible that people buy properties to live in with the long term in mind rather than buying them for short term speculative purposes. I believe these measures could contribute to a more a balanced sustainable market. They could also act as a green light for homebuyers and investors who are prepared to be realistic about the prospects for house price inflation, with gains perhaps more closely linked to say the Retail Price Index in the future than the boom and bust conditions that we have experienced in the past.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
2nd September 2013
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