10th November, 2016 buy to let
  • As we all know, property prices are sensitive to interest rate hikes. Even more so, in today’s market, where prices are at historic highs with P/E ratios in countries such as the UK at over 9. 

    Any change in direction for interest rates would likely affect sentiment in the market and over a period of time, trigger a downturn. 

    In the aftermath of Brexit, it looked as though the BOE would continue to keep interest rates low, despite the threat of higher inflation. But the shock Trump victory could turn the best of BOE monetary intentions on its head. 

    Trump has pledged a combination of lower corporate and personal income taxes together with Roosevelt style infrastructure spending to “put Americans back to work”. Under circumstances of high unemployment, hundreds of billions of dollars into infrastructure when there is mass unemployment does indeed put people put back to work and results in higher economic output without the threat of inflation. 

    But when unemployment is low, as it is in the USA, that infrastructure spending just bids up the pay of people already in employment, resulting in higher prices. 

    The problem is, that higher budget deficits means the government has to issue more debt (bonds). which, with static demand, means lower bond prices, and therefore higher interest rates. 

    Combine this with Trump’s mass deportation plans, many industries would suffer labour shortages, which needless to say would mean those remaining in work or looking for work, could demand higher wages, contributing to higher inflation. And that means higher interest rates - which would force central banks in other countries reliant on borrowing to increase rates to attract buyers of their bonds.

    All of this will happen against the backdrop of Brexit where monetary policy has more or less run it’s course and fiscal spending, together with the proposed cut in corporation tax to 15%, are the only levers left to May’s government to support the economy as the UK exits the EU. 

    Much like the the USA, the UK is also close to full employment, so any fiscal spending and tax cuts will have the same inflationary consequences as the US, which will force interest rates higher. 

    This obviously should be a concern to the many buy to let landlords who are heavily leveraged and reliant on rental income to finance their mortgage costs - most of whom have a very slim spread between the interest they pay and the net rental yield received. 

    Just a 1-2% increase in interest rates could force thousands of landlords to liquidate their properties, sending prices into a downward spiral. 

    Whatever the happens, the political landscape has changed dramatically with Trump’s victory and is now a threat to property investors in the UK and beyond.

    by: Prime Asset Investments

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