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Rate rise could stall property investment

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A rise in interest rates in the next couple of months is looking to be an increasingly likely prospect, and could spell bad news for property investment in the UK.

The chances were increased after the Bank of England published its forecast for above-target inflation in two years' time. In a survey carried out by Reuters, all the economists they asked in the last week predicted that rates would remain the same this month - unchanged at 4.75 per cent.

Just over half, however, felt a rise to five per cent was likely in either April or May.

Higher interest rates could ward potential property owners away from taking out the necessary loans, faced with the prospect of higher repayment costs. On this note, HBOS is this week warning that the coming year will see a slowdown in loan growth.

Nonetheless, property consultancy Savills has announced that its pre-tax profits leapt from £34.1 million to £50.2 million during 2004, suggesting that the commercial property market has remained strong in recent months. Savills stated that its residential sales were proving "resilient" to rising interest rates, despite the slowdown in the mainstream market. The group sold 2,600 homes during the year with a total value of £2.6 billion, including the sale of eight houses in excess of £10 million in London.

The Royal Institution for Chartered Surveyors (Rics) found that more stable conditions in the UK housing market were fuelling above average demand for rented property in Wales, the Midlands, eastern England and south-east England.

UK demand from tenants for buy-to-let property in the last three months grew at its lowest level since October 2002 and Wales and Scotland still had the lowest rents in Britain over the quarter, with £343 and £382 respectively.

Rents across the UK climbed over the period, with increases reported across all regions, and the largest rises found in London and the North of England. Seventeen per cent of surveyors predicted that rents would rise over the next three months, with confidence highest in London, Wales, the North, and the Midlands.

"It looks like any signs of panic in the housing market are largely over, bringing stability to the lettings market. However, many people may still be wary of buying in the current climate - which bodes well for tenant renting," said RICS spokesperson, Jeremy Leaf.

Rics predicts that tenant demand for property and rents will continue to rise in 2005, increasing investors' rental returns.

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