As the dust settles following the budget we have been taking some time to do some analysis and it’s a very interesting picture. We thought we'd put together a short series of articles looking at the economy, predictions and stamp duty changes as there’s a lot to digest.
To kick off the series, we wanted to cover some key headlines that have followed the budget around the economy and house prices. It’s a mixed picture with a fair amount to cover and significant change to that of before the budget.
Mortgage Rate Predictions
Taking a look at the graph below, average mortgage rates are predicted to be about 0.3 percent higher following the budget between 2025 and 2030 than before.
There is also expected to be an increase in mortgage rates from the current average of 3.7% to an average of 4.5% by 2027, where rates are projected to remain until 2030.
The reason for this increased rate is a revision in the Bank of England base rate forecast that we will look at shortly. The graph below outlines this in visual form and for Medway investors owning an average terraced house, the additional three percent will add around £67 per month, or £810 per year. Our assessment is that rents will continue rising to adjust for this change.
House Prices
Reading a very interesting report from Savills, the prediction is that UK average house prices will rise by 23.4% (or £84k) over the next five years.
We have included a table below that outlines how this change breaks down across the country and you will see that the South East is anticipated to see a 17.6% increase.
If we apply this to the average Medway terraced house price of £270k, investors could anticipate capital growth of £47,520 giving an average price for a terraced house in December 2029 of £317,520. Considering this, the picture is strong and if yields of 5-6% hold up, average rents could be £1,323 - £1,587 per month or higher (we anticipate it will be more with stamp duty diminishing investor appetite) by the end of the decade.
Look at the OBR forecast below, and you will spot how house prices will see stronger growth following the budget than before it. You'll see how the forecast for growth after the October budget (the blue line) is stronger than the previous March forecast (the yellow line).
CPI Inflation
This has been a huge point over the past few years and something that has led to the significant rise in the Bank of England base rate, contributing to mortgage rate increases and more.
In the graph below, you can see how, before the budget, CPI inflation was forecast to achieve just under 2% (the yellow line on the graph below) and, following the October budget, inflation is predicted to be higher right through to 2026.
This CPI inflation being higher will undoubtedly drive less (or slower) Bank Rate drops, driving higher than previously forecast mortgage rates (as mentioned earlier). This might sound like bad news on the surface, however with the forecast increases to rents and house prices, our view is that the overall picture for property investors is a positive one.
There are several drivers for this increased CPI rate, but at the November Bank Rate announcement, Andrew Bailey said that there were:
“A range of factors pushing up inflation, including above-inflation increases in the minimum wage, broader pay growth and underlying pressures [which] meant the Bank could not afford to “cut interest rates too quickly or by too much”.
GDP Growth
As you will see from the graph below, this is an interesting point as annual GDP growth is forecast to be higher than the March prediction following the October budget for 2024 and 2025, but then fall behind from 2026 onwards.
According to the forecast, GDP per person is expected to return to early 2022 levels by the beginning of 2025 as productivity improves and both participation and saving rates begin to stabilise.
What does this mean for property investors?
We will delve into a little more detail about how the current politico-economic climate could impact property investors in our next blog but in short, higher house price growth is likely to lead to strong returns and lower GDP growth could lead to increased (or continually high) rental demand driving stronger rental growth.
Of course, it’s critical to remember that this is only one scenario and we never know what’s around the corner. However, with property remaining a reliable investment no matter what the economic climate, our assessment is certainly a positive one.
