One of the first things I do over my morning coffee is scan the financial press. This week the speculation is at a frenzy that interest rates will increase within months. Markets are now seeing two interest rate increases by the end of next year.
This has led to a big jump in value of sterling and the large housebuilders stock price taking a huge hit as investors are concerned that rising house prices will make homes less affordable.
I am often asked as to what the effect of rising interest rates will be and specifically on Regentsmead’s clients, small housebuilders. Is it what keeps our clients up at night?
On a macro level the actual impact of a quarter point rise may be negligible, especially given the fact that base rates are at 0.25% and that 60% of homeowners are on fixed-rate mortgages. Indeed Barclays has indicated that interest rates would need to be at 1.75% before affordability ratios become dangerously high.
However, it is the perception of rising interest rates, given that rates have been so low for so long that could have unpleasant effects. Once people already squeezed by rising inflation grow concerned about rate rises and the impact on their monthly repayments they might start cutting back. They could stop spending and it could quickly snowball and have an impact on the wider economy.
Whether you believe inflation at 2.9% is a temporary blip due to sterling’s weakness or more fundamentally a result of financial engineering since the financial crash of 2007-2008, the reality is that interest rates do need to increase at some point. Keeping them at an artificially low level for so long only seeks to create a bubble in asset prices and as we know bubbles burst at some point. Normalcy in rates needs to return but gradually.
From our borrowers’ perspective, a low rate environment has helped and hindered, given the doubled edged sword of rising land and house prices. We are not talking about the blue chip housebuilders who benefit from huge land banks and the help to buy scheme, which supports a significant proportion of some leading housebuilders’ sales.
Of course, our clients want a low unemployment, buoyant economy but for them they are concerned much more about access to finance and accessing plots of land at an affordable level. The high street banks’ lending criteria for small housebuilders since the crash has become so stringent requiring a level of capital that many small housebuilders simply do not have.
At Regentsmead we have been lending for over twenty years on the same principles: namely that we look at the client and the project and not on the basis of cashflow, monthly outgoings or capital. We realise that small housebuilders are vital and they are starved of the funding they need to build the right houses in the right locations.
So really a quarter point rise or two in interest rates may not even be on our client’s radar and certainly not the reason for any insomnia.