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Non-inflated expectations for investors

21st August 2009 | back to article listings BACK    print this article PRINT

For those investing in property, one of the keys to being able to do so is the availability of buy-to-let mortgages, something that has been hard to get hold of recently.

It is a well-documented fact that such deals have become increasingly scarce since the onset of the credit crunch, something which may have contributed to excessively gloomy forecasts about the future of the sector. These ignored the strength of many in situ investors, as well as the ability of some to make cash acquisitions as prices fell. Nonetheless, for many the return of more mortgages aimed at investors is important.

This, of course, mirrors the wider mortgage market, with the same concerns about the increase of mortgage supply existing among those keen to see the market pick up speed again. But while lending volumes may be creeping up, the fact remains that the base rate is at a record low – albeit something not always reflected in the amounts lenders keen to build up their balance sheets charge.

On the assumption that rising interest rates in the future will do nothing to bring down the cost of mortgages – even if when that happens banks will be better capitalised – those who can get a buy-to-let mortgage may be keen to do so while the monetary policy is as loose as it is. This, of course, depends on inflation remaining low.

The last set of official figures showed that the consumer prices index was unchanged last month at 1.8 per cent, suggesting that deflationary pressures are absent. But this view was not supported by Vicky Redwood, UK economist at Capital Economics.

She said: "It looks like inflation in the UK is still being rather slower to fall than elsewhere, but I think the underlying trend is down. That there is a large amount of spare capacity, or slack, in the economy continues to weigh down on price pressures. Overall, inflation will fall much further."

According to Ms Redwood, this will see the inflation rate drop below one per cent by the end of this year and could lead to deflation in late 2010 or 2011. In her view, only more quantitative easing can stop this.

Whether such a prediction will turn out right is uncertain, but in the context of the Bank of England's Monetary Policy Committee (MPC) minutes there may be a strong case to be made for such a forecast. Firstly, because the MPC is tipping the consumer prices rate to be very low in the month ahead and secondly because there is clearly a view in the body – albeit held by only a third of it – that a greater level of extra quantitative easing is needed than the £50 billion advanced this month.

So for those who are looking for a buy-to-let mortgage, the suggestion would be that inflation could indeed remain very low for a time. Of course, an increase in this might see a rapid monetary tightening. But those who can get the mortgage that enables them to invest before that occurrence may find themselves with a very good deal.

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