The cut in the Bank of England interest base rate from 5.25% to 5% in August is a welcome sign for businesses and individuals that the increases experienced since 2022 have come to an end.
Many businesses have been calling for a cut in the cost of borrowing, no more so than those in the property and construction sector. Although the recent reduction is welcomed, we are still far away from the historic low rates seen since 2010 and we need to adjust to the new normal.
For those looking to move home, there has been a small increase in average house prices in July which may help to unblock chains and give buyers and sellers the confidence they have been missing. Affordability still remains an issue for many even with a reduction in average mortgage deals and increased competition amongst lenders.
Those businesses that develop new homes will hopefully benefit from an increase in demand and see the cost of their own borrowing reduce, leading to more acceptable profit and providing confidence to start projects which may have previously been delayed. The positive news for house builders and others in the construction sector is that there has been a stabilisation of material costs in recent months after the double-digit percentage increases seen between 2021 and 2023.
This week, the government issued its latest building materials and components statistics and analysis for July 2024 - to read the commentary, please visit the gov.uk website.
The increase in house building, which is a major policy of the new government, will hopefully filter down to those businesses providing the labour and expertise needed to make this happen. The question will be, are there sufficient people with the right skills to build the targeted 370,000 new homes each year. The government have also pledged to make changes to make it easier for first-time buyers to secure a home.
The longer-term outlook for interest rates is not to expect further cuts in the short term. Many are saying it is likely to be October or November before the Bank of England has the confidence to make a small reduction and reduce the risk of increasing the rate of inflation beyond the target 2%.
The upcoming budget on 30 October may also delay the bank’s decision as it waits to see what changes are made and how this impacts the behaviour and confidence of businesses and consumers. This means that we are likely to see the current rates of interest for some time to come and both businesses and individuals will need to plan their finances based on these higher rates.
Although nothing is certain about the changes that might happen in the October budget, there is much speculation about changes to the rates of capital gains tax as the government looks to raise taxes without breaking its promise to leave income tax, national insurance and VAT unchanged. Some private landlords are considering accelerating the sale of their properties to avoid what might be a large increase in capital gains tax. Although there have been recent reports of modest increases in house prices, any influx of properties to the housing market is bound to have a negative impact on sale prices.
