Effect on the property industry of a rise in interest rates

publication date: Feb 17, 2014
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

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Effect on the property industry of a rise in interest rates

We often forget in the property market to comment on the impact of the economy, and things like interest rate rises, on the industry itself, so below are my thoughts.

On our consumer site, we have written two articles, one on The impact of interest rates on mortgages and the second, How a rise in mortgage costs will impact on buyers, sellers, investors, renters and renovators.

But if you are an agent, developer, legal company, surveyor or home improvement company, do chip in if you think I’m wrong or have more comments to add. Join my Linkedin UK Residential Property Group.

From a business perspective, rising interest rates will have a major impact on costs of any loans or overdraft facilities. For agents, sales is a pretty poor cash flow business, as all the work has to be done and paid for months, and in some cases, a year or more if it’s taking a while to sell, so if the cost of servicing debt goes up, this could be an issue and ‘tip’ some agents over into loss territory. 

However, as most agents now have a lettings business too, the cash flow issues can be somewhat smoothed over if they have a reasonable number of properties under management.

Where interest rate rises will impact though, is if it affects transactions. Already agents are struggling to survive on the number of sales' transactions and many are likely to be a few sales away from going under.

At the moment, funding for larger projects and major builders seems to be coming forward, as does government funding for the likes of build to rent. However, the difficult market to secure funding is for small to medium sized developers, and to some extent, the self-build or ‘custom build’ market as the government has ‘renamed’ it.

On the one hand, a rise in interest rates means the economy and hopefully the funding sector, is recovering. However, it also means the cost of borrowing to build will go up, which could severely hamper small to medium sized developers securing funding – reducing new build competition, which doesn’t help to curb price inflation.

The danger is if rate rises coincide with the loss of the Help to Buy funding, that could hold back the new build industry as they get a double whammy of rising funding costs and potential slowdown in demand.

Legal companies
For legal companies who carry out conveyancing, it’s all about transactions and the more the merrier. The credit crunch has been tough on solicitors and conveyancers in this field, so the main impact of interest rate rises will be a potential fall in demand, which if over a period of time, they will probably cope with, but if it’s a sharp rise which cuts demand quickly, this could mean letting people go they have just employed following the pick-up in 2013.

As with conveyancing, surveying relies on transaction volumes to survive. However, unlike the legal sector, surveying is extremely niche and takes a long time to train for effectively. As such, the current uplift in sales has meant surveyors are rushed off their feet, some taking weeks to get out to properties, slowing chains down.

Unfortunately, there are few well trained surveyors who can carry out the work, so lower transactions would mean currently busy surveyors may be able to take a holiday!

DIY & Home improvement companies
One of the areas which hasn’t been spoken about too much is the effect of a property market in the doldrums. Ian Cheshire, Chief Executive of Kingfisher, told the Telegraph the housing market was a “really critical, visible indicator” of the health of the economy. This is reflected in their share price: 284 in 2012 and rising to 385 in 2013.

However, rising interest rate rises may well choke off not only transactions, but also homeowners who may look to borrow money for home improvements.

Overall, from a property business perspective, sharp interest rate rises could end up causing companies ‘hanging on’ to survival to go bust. A smoother, long term rise in interest rates while the economy and funding lines continue to recover, could help to make sure the property industry, with the many jobs it delivers, can get out of recovery mode – as long as it doesn’t affect property transactions and new build development. 

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