MNI INTERVIEW:Structurally Higher Rates To Sap UK House Prices

Flat or rising real interest rates, underpinned by a structural decline in demand for gilts, and a shift to working from home are set to exert downward pressure on UK house prices after decades of strong growth, a former Bank of England Monetary Policy Committee member and top Office for Budget Responsibility official told MNI.

The long decline in real interest rates through the past 40 years is unlikely to be repeated and upward rate pressures could be reinforced by factors sapping demand for government bonds, David Miles said in an interview. Defined-benefit pension schemes, which have provided much of the demand for long-dated gilts, are in decline, with defined contribution schemes, which allow holders to choose their own risk profiles, unlikely to make up the gap, he said. (See MNI INTERVIEW: UK Long-End Gilt Market Functioning Better- DMO)

Because banks' effective cost of funds is linked to gilt yields, this will tend to prevent borrowing to buy a house becoming more affordable, ending the long declining trend for real rates. (See MNI: UK Infrastructure Drive Risks Sapping Demand For Gilts)

"A re-run of the last 40 years, is very unlikely. So I would stick with the view that real interest rates will no longer be an upward force for house prices,” Miles said.

While market expectations that real rates will head higher could prove to be wrong again “I think it’s more likely than not to be at least neutral, or indeed quite plausibly a negative, for real house prices,” Miles said.

WORK FROM HOME

The shift to work from home will also reduce demand for more expensive homes closer to workplaces, he added.

"Whilst you would bid up prices of properties further away from urban centres, the gap at the moment is so big that it still leaves room for a big increase in the relative prices of properties far out. But the average house price can still come down significantly,” he said.

In the longer term, despite a near-term surge in net migration, the UK's ageing population will also eventually push down on house price demand, he said.

"In the absence of high migration indefinitely, it's likely that the population of the UK will at least flatten off,” Miles said.

Are “house prices definitely going to fall? Each of the three factors, work-from-home, demographics, real interest rates, are I believe probably going to push down gradually on house prices. But it's not a slam dunk on any one of them,” Miles said.