Economic Update: Bank of England Base Rate Cut and Housing Market Reforms

Today marks a significant shift in the economic landscape as the Bank of England (BOE) has cut the base rate from a 16-year high of 5.25% to 5%. This decision reflects a critical move amidst evolving monetary policies and housing market dynamics.

Bank of England’s Base Rate Cut

After three years of tightening monetary policy in response to rising inflation, the BOE’s recent move signals a shift. Despite expectations that the BOE might hold the rate following the US Federal Reserve’s decision to do so, a close vote saw 5 out of 9 members of the Monetary Policy Committee favoring a 25-basis points reduction. Governor Andrew Bailey cited eased inflationary pressures as the justification for this cut but cautioned against anticipating a series of consecutive cuts, emphasising a cautious approach to avoid excessive or rapid reductions.

Inflation, currently at 2%, is expected to rise slightly over the coming months, adding complexity to the economic forecast. With the first Labour budget announcement hinting at potential tax increases, the pressure mounts on Chancellor Rachel Reeves to maintain positive economic momentum.

Labour Government’s Impact on the Housing Market

The political landscape also saw a dramatic shift on July 4th as Britain welcomed a new government. After 14 years in opposition, Labour secured a landslide victory, promising to revitalise economic growth and address long-standing housing market issues. With a substantial majority of 174 seats, Labour is well-positioned to implement its ambitious agenda.

Labour’s manifesto included a significant focus on the housing market, pledging the largest increase in social and affordable housebuilding in a generation. Key proposals include the introduction of GB Energy, immigration system reforms, and an additional 40,000 NHS appointments each week. However, landlords face uncertainties, particularly regarding the planned end to Section-21 no-fault evictions and potential rent controls.

The new government aims to reform the planning system to facilitate the construction of 1.5 million new homes over the next five years. Additionally, there is a renewed focus on improving the energy efficiency of private rental properties. Landlords may soon be required to upgrade properties to achieve an EPC rating of C or above, with little detail provided on financial support for these upgrades.

Mortgage Market Adjustments

The mortgage market has experienced significant fluctuations over the past few years. The first half of 2024 saw both residential and Buy-to-Let (BTL) mortgage rates rise, with some products featuring high fees of up to 9.99%. As swap rates fell, more competitive rates have returned, yet those coming off fixed rates taken out in the past five years will still face a payment shock.

Encouragingly, lenders have continued to reduce fixed-rate products and strengthen lending policies to attract new business. This has enabled landlords to diversify and strengthen their portfolios, navigating the challenges posed by economic uncertainties.

Specialist BTL lender Shawbrook reported a significant increase in the HMO (House in Multiple Occupation) sector, with approximately a third of its business now in HMOs. This trend reflects landlords’ strategies to diversify portfolios and adapt to the current economic environment. HMOs offer higher rental yields and more frequent tenant turnover, allowing landlords to stay aligned with market rents and ensure mortgage affordability.

Expert Insights

Lucian Cook, Head of UK Residential Research at Savills, commented on the base rate cut, stating, “While today’s base cut is unlikely to have a significant immediate impact on the cost of mortgage debt, it is likely to provide an important fillip to buyer sentiment coming into the Autumn market. It sends an important signal that affordability pressures are going to progressively ease, with the prospect of a gradual improvement in the range of buyers in the market and their buying power.”

Daryl Norkett, Director of Real Estate Proposition at Shawbrook, added, “HMOs have proven to be a sound strategy for landlords looking to diversify their portfolios, as well as a strong option for non-portfolio landlords entering the market. HMO rental yields are more easily able to afford mortgage lending in a higher interest rate environment, and the regular turnover of tenants allows landlords to stay on track with market rents.”

Conclusion

The recent economic updates highlight a period of adjustment and adaptation for both the banking and housing sectors. The Bank of England’s cautious rate cut, coupled with Labour’s ambitious housing reforms, sets the stage for significant changes. Landlords and investors will need to stay informed and agile to navigate these evolving dynamics successfully.

Disclaimer: Your home may be repossessed if you do not keep up repayments on your mortgage. Please note that some Buy-to-Let/investment mortgages are not regulated by the FCA.

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