The Big Reset ?

Conspiracy theorists fervently believe that this is coming in the world as Bill Gates et al take control of your minds! Now whilst I can confidently debunk that particular idea, It perhaps seems possible that following the sudden spike in fixed interest rates, we may be about to see a big reset in the property market?

You see, most North of England  buy to let investments currently yield around 6% or 7% – with some lower quality properties a little higher yield and vice versa. In this last week we have seen the five year fixed interest rates spike at between 6% and 6.5%, and commercial property rates even higher. That is about 3 times what these rates were earlier this year. Variable rates are lagging somewhat, but assuming the Bank of England instigates a couple of further rises this year, then variable rates won’t be too far behind.

Over the last few years, I would say that the difference between buy to let loan fixed interest rates and buy to let yields has been around 4% to 5%. So if we assume this continues, then yields must rise to c. 10% to achieve the same financial outcome. This suggests that for an average North of England buy to let worth £110,000 and renting at £650 pcm/£7800 per annum (ie yield of 7.1%), the price would have to fall to c. £78,000 to achieve the same result. That would represent a fall in value of almost 30%.

I don’t think property price falls will be near that magnitude (certainly in the short term), as rents will no doubt be pushed up, and fixed rates are thought likely to fall a little after the recent spike. Also, owner occupiers continue to be active (although for how long?) and there will inertia in the market to resist quick and immediate falls.

But it certainly would appear that activity is going to very subdued for a while until the market does indeed reset itself. After all why would property investors borrow to buy property with a yield of 1% over current interest rates?  But somewhere down the line as the market adjusts there should be some cheaper property available to offset the higher finance costs.