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Base rate remains low and Office for Budget Responsibility says: house price rises likely to outstrip pay rises for up to a decade

Earnest Knight important market News Roundup
Last updated: Friday, 11th July 2014
The Bank of England has again maintained the base rate at 0.5% at yesterday’s lunchtime meeting, with many being left confused by inconsistent messages emerging from the Bank's chief, Mark Carney, about when rates may increase.
In a further worrying move by banks, borrowers are now also being advised by their lenders that they cannot change existing high-rate variable mortgages to lower rates, and blaming new affordability rules that were backed by the Bank of England.
Mr Carney started his tenure as Governor last Summer, with the prediction that unemployment falling below 7% would trigger a review of the historically low rate, which wasn't expected to happen until 2016. The comment was quickly re-qualified in January this year, when the unemployment figure dropped faster than expected, down to 7.1%, with the Bank of England making reference to wage growth being muted and therefore the timing not being right to increase rates any time soon.
Since then UK house price reports have steadily increased, particularly in the capital, threatening to derail the UK economic recovery. As a result, warnings were issued by senior international economists, like Christine Lagarde, Chief of the IMF, to warn that the biggest threat to a UK economic recovery was unsustainable house price inflation. Carney reacted to this, and made moves to further tighten regulation on the banks around mortgage lending.
Following the launch of the Mortgage Market Review in April 2014, the biggest shake-up of existing lending rules for over a decade, the Bank of England enforced lending caps on the banks, with a multiple of no more than 4 times income for large loans in excess of £500,000. This was expected to curb London prices in particular, where a lot of the larger loans were being granted. RBS and the Lloyds Banking Group, both majority owned by the Government, launched these lending caps within days of each other.
But, as we can see from the national press, this is not having the effect of reducing the property prices as the demand remains high and in our opinion the basics of economics continue to work in our favour in the UK market. Supply and demand is positioned perfectly for us to keep enjoying the benefits of investing in UK property market.
On this note, from the recent article, as published in The Telegraph, UK property funds continue to see an increase in investors with the recent statistics from the Investment Management Association (IMA) showing that more than £491million was poured in to property funds by British savers in May alone, making property funds “back in fashion” again. According to The Telegraph, not since December 2009 has so much money been allocated to property in a single month.
In other parts of the UK we have seen excellent reports concerning the rental market and consistent increases over the previous periods. Namely, in Scotland, according to Lettingweb and their latest quarterly report on Scotland’s private rented sector (PRS) there is a notable increase in demand, that is now outstripping supply, in areas such as Aberdeen and Edinburgh showing that Scotland’s PRS is thriving at the moment, with a few localized issues that are caused by a lack of supply.
Another thought on many investors’ minds was the situation with the possible Scottish independence and its effect on the property market, but from what we have seen in the press recently that issue, in our opinion, still sits favourably towards the property investors. As evidenced by one of the BBC News recent articles, there is a planned £1billion of investment from the UK and Scottish governments going into the Glasgow and surrounding areas alone over the next period.
Furthermore, according to the Office for Budget Responsibility (OBR), soaring house prices are likely to outstrip pay rises for at least the next 5 Years and possibly for decades to come, as the government’s official forecaster warned. OBR says only “historically unprecedented” housebuilding activity can prevent loan-to-income ratios rising year after year.
Based on all of the above, Earnest Knight position remains logically very bullish on the UK property market as we continue to see excellent statistics and results providing for great medium to long term gain possibilities when investing in this market wisely.
For more info or an informal chat about your own circumstances or approach to investing in the UK property market at the moment please do not hesitate to contact Earnest Knight Consulting direct on either 0208 6109 472 or our Freephone number 0800 3689 317 or alternatively emails us at:


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