BLOG: Will higher interest rates damage estate agents’ businesses?

Now that interest rises have increased substantially, the Bank of England has been cranking up interest rates as it tries to reduce inflation, which at present is at circa 10%.

Chancellor Hunt is raising taxes and cutting government expenditure to address the debt void created by Covid and presently, the underwriting of the energy crisis.

But how will this all affect the residential property market and where is it all heading?

I am trying not to be a ‘contrarian’, so I would like to be the bearer of some glad tidings amongst all this doom-mongering.

Let’s start with inflation. Yes, it is eyewatering, but as any economist will tell you, it is a lagging indicator and the good news is that world prices of energy costs, commodities, raw materials, shipping and transport costs are significantly down from the heights of a few months ago.

While the underpinning of energy costs may be hugely expensive for the Treasury, all these factors will have a deflationary effect.

Interest rates

Also, 80% of mortgagees are on a fixed rate and therefore the present hikes will not influence sentiment, or affordability, for one to two years.

The UK follows the American economic model and over ‘the pond’ inflation is coming down, and pundits here are predicting that inflation in the UK will be circa 4% next year and, although interest rates have risen a great deal in a short time, they will peak during 2023 at around 4% or 5%, so as not to exacerbate the shallow recession that we are entering now.

Once inflation is under control it is reasonable to assume that interest rates will move down again, having had their beneficial effects, since increased taxes will carry on calming things down.

In the UK we build at least 150,000 homes less than the optimum needed to keep control of property price inflation. This will underpin any fears of a housing price crash, since the unemployment rate is hardly a worry, people, generally, feel secure in their jobs and will receive in the private and public sector an average of 5% wage increases to counteract inflation.  This will also ensure stability of the property market.

Applicant drop

As to the [London] middle market of between £1 million and £3 million, a few months ago, at the peak of the market, you would have had some 40 applicants over a property resulting in around five offers. Today you would get 20 appointments to inspect and offer.

Nevertheless, my agency Glentree has been busier during the past six weeks for the middle to top end of the market than we have over the past three months with the sale price in Northwest London being about £1,070 per square foot on average.

Properties in the lower to middle market take about three months to sell, with properties over £10 million taking up to three years.

Sale prices are approximately 13% up from asking prices according to our data. The cheap pound is a great allure for anyone lucky enough to have dollars and foreign investors are coming back into the water having been absent for a little while.

We sold a property recently for approximately £10 million in Bishops Avenue in a matter of 28 days from instruction, which gives you an illustration that people still feel very confident.

I think the predictions of a long and drawn-out recession are overdone and I see the property market moving sideways for a while.

Issues such as negative equity and repossessions of homes should therefore not be the biggest worry to the Prime Minister and the Chancellor.

Trevor Abrahmsohn is founder and MD of London estate agency Glentree.