It seems that UK property investors can look forward to many more months of good returns as the Ernst & Young ITEM Club, which bases its forecasts on the Treasury's own model of the economy, predicts that the Bank of England's base rate will remain on hold until 2014 in order to offset the coalition government’s ambitious austerity measures.

The ITEM Club’s latest report echoes the sentiment of both the Centre for Economics and Business Research (CEBR) as well as the British Chambers of Commerce (BCC). The CEBR predicts no rise in interest rate for at least 18 months, while the BBC says rates will be on hold until at least May 2011. Only a third of economists now expect a rate hike in 2010, according to a recent poll by Reuters.

UK property investors have now enjoyed the benefits of a 0.5% base rate since March 2009 with most paying a mere 2.5% interest on their investment mortgages. This along with some good growth in the private rental sector has led to some substantial gains from rental income.     

Rates are controlled by The Bank of England's Monetary Policy Committee who is tasked by the government to keep inflation below 2% and above 1%, looking two years ahead. There have been concerns over the high rate of UK inflation lately, with some economists calling for a rise in interest rates to stop it from getting out of control. UK inflation was above forecast for several months and hit 3.7% in April but the Bank confirmed in its quarterly inflation report (12 May) that it expects inflation to remain below the 2% target in two years time and the CPI rate has continued to fall (down to 3.2% in June). So in theory, no rate rises are needed in the near-term.

This was confirmed by the Governor of the Bank of England, Mervyn King in his adres to the cross-party Treasury select committee at the end of July. The Governor said the Bank of England is in no hurry to raise interest rates as he warned several risks remained to the recovery and that there was no talk of "applying the brakes" yet. Despite his caution over the latest data, King was also less pessimistic than many other economists on the UK outlook.  Answering questions from the Members of Parliament (MPs), he played down fears raised by other economists, the Treasury committee itself and trade unions that the new Chancellor of the Exchequer's package of spending cuts and tax rises could derail the recovery.

His views echoed those of the Item Club which said while high energy prices and the increase in VAT will keep inflation above target over the next 18 months, it will move below 2% as those effects wear off and spare capacity bears down on pricing decisions. It also added that while the coalition-government's package of spending cuts and tax hikes will slow economic growth over the next two years, it will ultimately make the recovery more sustainable.

So while there has been much talk about a hike in interest rates to control inflation, it’s important to remember that it’s actually deflation that poses the bigger risk to the UK Government. This is due to the fact that deflation effectively makes debts grow, and considering the level of government debt this would be a nightmare scenario. So it’s likely that while the economic recovery is fragile, rates will remain low.

That said you shouldn't entirely put your trust in any predictions, including those made by leading economists. At the end of the day, your financial decisions should be based on protecting your finances as best you can rather than trying to predict the future. Analyze every investment based on its own merits and don’t under any circumstances buy property that doesn’t put cash in your pocket every month. One thing that does look clear is that UK interest rates are likely to remain very low for a considerable time to come, regardless of when they first start to rise. And with a strong ZAR and some desperate UK sellers, savvy South African investors might just get a second bite at the cherry.

If you have questions or want to talk through how Smuts & Taylor can help you invest in London with confidence, feel free to call the office on +2711 083 6366 or contact me directly on +44797 1000 667.
 
Wishing you health, wealth and happiness,

Mike Smuts
Property investor and MD of Smuts & Taylor