How Interest Rate Rises May Affect UK and USA Real Estate Investment

As global financial markets adjust to the prospect of central banks increasing interest rates in response to rising inflation, the soaring cost of living and weaker levels of economic growth than predicted thanks to the emergence of Omicron – what could this mean for property markets in 2022? 

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Bank of England raises interest rates from 0.1% to 0.25%

In December, the BoE increased interest rates from 0.1% to 0.25%, with expectations that rates will steadily rise to over 1% this year as they seek to dampen inflation. 

Inflation reached 5.1% in November 2021 and is expected to be driven up to close to 6% come the spring. However, markets have raised their bets on a second Bank of England rate increase in three months after data showed stronger-than-expected growth in November. 

The Office for National Statistics revealed the economy returned to its pre-pandemic size for the first time after a 0.9pc jump in GDP, far faster than the 0.4pc growth expected by economists.

Homeowners are most expected to feel the squeeze, with rates on new mortgages predicted to rise to their highest levels since the Brexit referendum in 2016. With forecasts that interest rate rises on an average mortgage may go from 1.5% to 2.4%, for an average UK mortgage holder, this is expected to rise monthly costs by around £100 per month. 

Fed interest rate rises rocking markets

Minutes from the Federal Reserve’s December meeting were released last week where policymakers indicated three increases this year and three in 2023. However, the chief executive of JP Morgan, Jamie Dimon warned that there “is a pretty good chance there’ll be more than four. It could be six or seven”. 

Since the minutes were released, many economists are forecasting that the Fed may raise interest rates quicker and shrink its balance sheet sooner than investors may have expected, with a dramatically faster pace of interest rate rises than anticipated when the Fed last released projections in August. 

The Omicron effect

A large factor in the adjustments to forecasts for inflation was the pre-Christmas emergence of the Omicron variant. As the UK readjusted social distancing measures and other countries followed suit, it was unclear how much the new variant would impact labour and goods supply around the globe. Any disruption to the supply of goods and services is likely to add inflation pressure down to the potential shortages. 

What does this mean for investors?

Like any prediction, it depends. Landlords who rely heavily on borrowing and increase mortgage repayments will affect margins. 

However, for many, rising mortgage rates can be a positive as the market for rental property increases due to fewer households qualifying for mortgages. Additionally, rising interest rates may reduce prices so, for those with cash to spend, it can be a great time to find a bargain. 

As always, it’s wise for investors to consider specific trends within their own portfolio and act accordingly. 

Get in touch today with any questions you may have regarding real estate investment – our experienced property consultants will be happy to assist you. You can also have a look at some of our current properties here.