What Negative Interest Rates mean for the Housing Market?

The Bank of England (BOE) is expected to announce its findings on the impact of negative interest rates on the UK economy, including cost-benefits analysis on February 4. We explore if negative interest rates can work in the UK and what it means for the housing market.

 BOE's base interest rate is currently set at 0.1%, which is the lowest ever in its history. So why would the bank consider further cut to the interest rate? This is because the UK consumer price inflation stood at just 0.8% in December; this is well below the BOEs target of 2%. This is after the bank pumped in £300 billion of quantitative easing into the system last year due to the pandemic.

 This could pave the way for negative interest rates very shortly as the bank wants to encourage spending. If the inflation is too low, or negative, some people may put off spending, as they expect prices to fall. Although lower prices sound like a good thing, if everybody reduced their spending, companies could fail, and people might lose their job, and that I am sure we can all agree is not a very good outcome.

Do Negative Interest Rates Work?

The UK has never had negative interest rates, but some countries like Japan, Denmark, and Sweden have trialed this with mixed results. Denmark introduced a negative interest rate mortgage in 2019. Jyske Bank lent money at a rate of -0.5%, which meant the sum they owed fell each month by more than the sum they had repaid. There is no reason why UK lenders could not follow suit, although so far there is no sign that any will. In the meantime, the fixed rates for mortgages have continued to fall with Barclays offering a 2-year fixed-rate at 1.44%.

 A negative base rate means banks and building societies have to pay to keep money on deposit, and it is designed to discourage them from doing so and make them keen to lend. JP Morgan predicts that a quarter-point cut in interest rates to -0.15% could cost the big five banks £1bn. This could make them keen to lend as hoarding cash could become expensive, and low-interest credit availability could fuel spending across the economy, bringing inflation in line with BOEs target of 2%, creating growth and jobs “in theory”. 

What does this mean for the Housing Market? 

According to nationwide, the outlook for the housing market remains highly uncertain over the coming months. Much will depend on how the pandemic and the measures to contain it evolve along with government policy. There is talk of the extension to the stamp duty holiday. However, it is 50-50 if that will be extended, in my opinion. Suppose the stamp duty holiday ends. In that case, this could add further uncertainty to house prices over the coming months, along with the impact of Brexit. If the labor market weakens as most analysts expect, then the housing market activity will slow over the coming months.

Fears over what might happen to house prices might mean banks are still likely to lend very carefully, but they should not need to restrict the range and number of mortgages on offer. The housing market's past years' resilience may make lenders confident that the UK housing market is resilient enough and less prone to a crash as in the 2008 financial crisis. Since the financial crisis banks have put in stress tests and vetted customers more thoroughly to ensure they can afford the mortgages and avoid crashes like the one in 2008.

This would bring mortgage rates even further down and make it more affordable for those looking to buy or make existing homeowners repayments even lower if they re-mortgaged. It will also be good news for investors as it would make interest-only mortgages for BTL even cheaper than they already are. Allowing them to bank more of the rental income and increase the yield on investment. Negative interest rates will make owning a house more attractive.

 However, future uncertainty might discourage some buyers. Still, it will make it more attractive for investors as they plan for the long-term capital appreciation and take advantage of low-interest rates to maximise rental yield.