The buzz around Bermondsey, Canada Water and Rotherhithe is all about the rise in interest rates, inflation, and how those two factors will influence property values. Many residents believe that rates and inflation will negatively impact real estate values. However, Matteo shares his expert insight that “interest rates are rising and rather than seeing price going down we are seeing so many buyers trying to secure a property and a decent mortgage rate prior to a further rate increase. Many overseas investors are back taking advantage of a weak pound”. “With an instable stock market and a rental market that is litterally booming with rent prices up 20% compared with last couple of years, many local clients are investing in properties for the first time ever” Alex added.
So, who’s right? First, we need to expand our understanding of interest rates, the reason for the rising rates, and what inflation is.
The Bank of England Image: Bloomberg
Bank of England Interest Rates Explained
The interest rate set by the Bank of England, which is currently 0.75%, is the rate at which it lends money to commercial banks overnight. This affects what banks charge customers for things like overdrafts and loans.
The reason rates are rising, is because inflation – as measured by the Consumer Prices Index including owner occupiers’ housing costs (CPIH) – was 2.1% in August, up from 1.9% in July 2018. The target set by the Bank of England’s Monetary Policy Committee (MPC) is for inflation to be at, or around, 2%.
In order to bring inflation back down to this target, the MPC needs to raise rates and slow down the economy. However, they will only do this if they think the economy can handle it without going into recession.
What is Inflation?
Inflation is when prices rise. The official measure of inflation is the Consumer Prices Index including owner occupiers’ housing costs (CPIH). When prices go up, the value of money falls. This means that, even if your salary increases in line with inflation, you will not be any better off than you were last year.
How Does Inflation Affect Property Prices?
The relationship between inflation and property prices is complex. Generally speaking, prices are driven by demand and supply – if more people want to buy a property than there are properties available, then prices go up.
Inflation can have an impact on demand in two ways. Firstly, if incomes are not keeping up with inflation (known as real wages), then people will have less money to spend on housing. Secondly, if the cost of borrowing goes up (as it is currently doing), then this will make buying a property more expensive and so reduce demand.
On the other hand, inflation can also increase demand for housing by making people feel like they need to buy a property before prices go up even further. This is what we are currently seeing. Buyers are jumping to secure properties before rates go up as predicted by the end of the year.
It’s worth noting that, while interest rates and inflation are currently rising, they are still very low by historical standards. In the early 1990s, mortgage rates were around 15% and inflation was over 10%.
What Does This Mean for Property Prices in SE1 and SE16?
Will the property prices in Bermondsey, Canada Water, and Rotherhithe drop or increase next year? We don’t have a magic wand and can’t predict what is going to happen in the short term but considering all the projects happening in the area, like the Canada Water Masterplan and The Old Biscuit Factory development we can only see values improve in the long term for this area. It comes down to supply and demand and we strongly believe these are some of the best (if not the best) areas to live in London as a whole.
Overall, real estate is a solid long-term investment that continues to show value and growth over time. So, while rates and inflation could slow or stunt growth in the short term, historically we know real estate values will eventually rebound. So, if you are considering buying a property, now might be the perfect opportunity. Rates are expected to go up before the end of the year!
If you’re thinking of buying or selling a property in Bermondsey, Canada Water, or Rotherhithe, Alex and Matteo are your local property experts.