The UK’s property market will take this week’s expected rise in interest rates in its stride, according to ratings agency Moody’s, but it warned that the outlook for the buy-to-let market has worsened significantly.
The agency, which along with Standard & Poor’s was widely condemned for awarding triple-A ratings to sub-prime mortgage books before the 2008 financial crisis, said the British property market is more resilient than is widely believed.
Moody’s economist Colin Ellis said: “We haven’t seen quite the negative impact from the Brexit referendum that some had forecast, but then we weren’t as bearish as the OECD [Organisation for Economic Cooperation and Development] or the NIESR [National Institute of Economic and Social Research].
“The [property] market is holding up OK. There is an underlying resilience in prices even if transaction activity has been affected. If you look at the balance between the cost of renting or buying, then UK house prices are not overexposed.
“Shocks are being dealt with, and even in the event of a Brexit no-deal, then it’s not looking like the UK economy falling off a sharp cliff.”
On Thursday the Bank of England is expected to raise interest rates for the first time in 10 years from 0.25% to 0.5%. But Moody’s said it was relaxed about the impact on households and their ability to continue paying mortgages.
“We have expected a rate rise for some time. This is about taking away emergency stimulus introduced after the referendum vote. A rise of 25 basis points [0.25%] is not going to move the dial. A rise of 0.25% pales into insignificance compared to the 8%-10% decline in the currency.”
Estate agents, faced with the first rate hike for a decade, have been keenly talking up the housing market.
Russell Quirk of eMoov said: “Any increase in monthly payments, like interest rates themselves, will be marginal and manageable for those impacted. On the typical £150,000 loan, homeowners will be out of pocket around £15 to £30 a month, certainly no grounds to shout ‘financial meltdown’.
“House price growth and the market’s overall stability have been incredibly resilient despite the EU vote and a snap general election. A few quid added to the average mortgage repayment will not deter this growth in the medium to long term.”
However, Moody’s warned that buy to let is the weak link in the property market. It said it expected a rise in arrears and defaults within packages of buy-to-let mortgage loans, particularly on borrowing in recent years.
It warned landlords to expect falling rental income, particularly in London and the south-east, while rising taxes will also make it more difficult for landlords to cover their mortgage payments.
“Landlords will have much less wiggle room,” said Moody’s analyst Annabel Schaafsma. “Arrears will go up, although the increases will not be astronomical and they are increasing from a low base.”
Most books of UK mortgages which have been packaged up as instruments to be traded on markets remain triple-A-rated, said Moody’s. But the agency insisted that it has tightened up standards since the financial crash exposed some triple-A mortgage books as sub-prime junk loans.