Is Now a Good Time to Invest in Property? Understanding the Impact of Rising Interest Rates.

Introduction:

Investing in property requires careful consideration, especially when facing changes in interest rates. With the recent increase in the Bank of England base rate to 5%, many potential investors are wondering about buy to let property investment, interest rate rises and whether now is now a good time to invest in property? In this blog post, we will explore the effects of rising interest rates and delve into historical property market trends to help you make informed investment decisions.

The Significance of the Bank of England Base Rate Increase:

The Bank of England base rate serves as a crucial indicator for interest rates in the UK. According to the Bank of England's website, interest rates have been raised to 5% in a bid to tackle rising inflation which currently sits around 9% with a target of just 2%. Interest rates are being reviewed every 6 weeks and the future of these rates is still uncertain with the next interest rate decision on Thursday 3 August 2023.

"Raising interest rates is the best way we have of getting inflation back down to the 2% target."

By examining historical interest rate hikes, we can gain insights into their impact on the property market. For instance, during previous rate increases, property prices experienced fluctuations, with some regions more affected than others. The 1981 and 1991 house price crashes were both preceded by significant interest rate increases.

Whilst prices could come down, they could also increase or simply level out in some areas of the country. A lot of this depends on supply and demand as well as the demographic of people in these areas. Areas where homebuyers have more disposable income could lead to prices remaining stable or increasing as they can ride out interest hikes on mortgages better than others.

In a period of high-interest rates, young people may prefer to keep renting, rather than take on an expensive mortgage.

Supply and Demand Dynamics:

Understanding supply and demand dynamics in the property market is essential when assessing investment opportunities. Factors such as population growth, housing shortage, and regional variations play significant roles. We can look at both sides of this too - demand from homeowners as well as demand from renters.

For example, whilst it may pay off in the long run for capital growth by buying an investment property where you are competing with other homeowners and ultimately paying more for the property, your short to mid-term return on investment will suffer greatly due to the interest paid on a mortgage.

Comparatively, purchasing in an area with lower house prices but high demand from tenants may well mean you can achieve a much higher ROI percentage and therefore cover off the current interest rates. Additionally, assessing the impact on affordability for potential tenants can help investors gauge the demand for rental properties.

Property Guru are seeing many cash buyers buying in the northeast currently in areas such as Sunderland and County Durham.

Regional Variations and Emerging Markets:

The UK property market exhibits regional variations, with certain areas experiencing different growth rates and demand levels. Examining historic trends specific to regions can help identify potential opportunities and risks. Moreover, exploring emerging markets or areas undergoing regeneration might offer insights into areas where investment could yield favorable returns despite interest rate hikes.

Sunderland and Bishop Auckland are currently undergoing impressive regeneration with large amounts of investment dedicated to the areas and their improvement. Whereas in the northwest, Manchester is seeing huge investment purely to keep up with the growth in the region. You will find very different pricing and returns on investment across these regions, so a lot will come down to your budget and investment goals.

Alternative Investment Options:

While property investment is popular, it's worth considering alternative investment options during times of rising interest rates. Historical data can help evaluate how other investment vehicles, such as stocks, bonds, or REITs, have performed during similar periods. Comparing their performance and potential returns to property investments can assist in diversifying investment portfolios. Savings accounts are paying out much better interest rates currently, especially if you are willing to lock your funds away for a fixed period of time. Property Guru can provide financial breakdowns and examples of current off market buy to let investment properties for sale in order for you to better make an informed comparison and decision.

Strategies for Navigating Rising Interest Rates:

Investors should employ strategies to mitigate risks associated with rising interest rates. Historical case studies provide valuable lessons on successful approaches used during previous interest rate hikes. Examples of effective strategies could include refinancing mortgages, adopting flexible lease agreements, or targeting properties with strong potential for capital growth.

If you already have a property portfolio, now might not be the right time to refinance however, it is good to keep an eye on the interest rate changes as to when they fall to a level that you deem appropriate to refinance the properties. On the other side of things, whilst interest rates are higher than they were, it is worth looking at current property deals to see if pulling cash out for another investment purchase would be worthwhile.

Long-Term Investment Outlook:

Investing in property should be approached with a long-term perspective. Historical property market trends can illustrate how the market has rebounded and adapted to interest rate fluctuations over time. By examining these trends, investors can develop realistic expectations and make informed decisions regarding their investment duration.

During COVID we saw a huge rise in property prices as well as rents. Whilst this may be cooling in some areas now, it goes back to our earlier point on supply and demand and how this could affect your investment portfolio in a positive manner.

Assessing Risk Tolerance:

Every investor has a unique risk tolerance level. By considering factors such as personal financial goals, investment time horizon, and risk tolerance, individuals can determine whether the current market conditions align with their investment strategies. It may be that some investors look at this market as an opportunity to cash buy and 'park' their cash into a high yielding property until such a time that interest rates fall and refinance. Alternatively, investing if prices drop could be a great way of accelerating capital growth when prices begin to rise again.

Professional Advice and Due Diligence:

Lastly, seeking professional advice and conducting thorough due diligence are paramount. Historical market trends can offer valuable insights, but individual circumstances and market conditions may vary. Consulting with property professionals, financial advisors, and legal experts can provide personalised guidance tailored to your specific investment goals. They can help analyse historic trends, assess current market conditions, and provide informed recommendations based on their expertise and up-to-date information. Property Guru are able to share current investment deals and you can also view off-market buy-to-let property for sale on their website.

Conclusion:

Assessing whether it's a good time to invest in property amidst rising interest rates requires a comprehensive understanding of historical property market trends. By examining the effects of previous interest rate hikes, analysing supply and demand dynamics, considering regional variations, and exploring alternative investment options, property investors can make informed decisions aligned with their financial objectives. It's crucial to balance historical insights with current market conditions and seek professional advice to navigate the complexities of the property market successfully.

Disclaimer: The information provided in this blog post is based on historical data and general market trends. It should not be considered as financial or investment advice. It's recommended to conduct thorough research, consult with professionals, and assess your specific circumstances before making any investment decisions.

Investing in buy-to-let property