1.5% per cent cut in Bank of England Rate

By November 7, 2008Articles

Interest Rate cut of 1.5% 06 Nov 2008

Ordinarily, a huge base rate reduction of 1.5% would have Britain’s consumers running for the tills and buyers flooding into the housing market.
But these are not ordinary times (and the Bank of England is counting on it, otherwise their move would be inflationary). The immediate effect on the housing market will be minimal because it is lack of mortgage availability, not mortgage costs that is driving the downturn. Over recent months, base rates and mortgage rates have decoupled, with lenders becoming more and more risk averse and much more reliant on their deposit takings and accordingly we’ve seen lenders failing to pass on the benefits of base rate cuts to mortgage borrowers in most cases as, in competition for funds, they struggle to keep their deposit rates high.

While a 1.5 pc cut in base rates is so significant that lenders will be hard pushed not to pass some of this on to borrowers, in the mainstream market, mortgage availability is the key issue and not mortgage affordability. Unless a rate cut is linked to a freeing up of credit and the relaxing of loan to value criteria, there will be a delay before the effect of cuts is felt in the housing market.

Having said this, the cut may have changed the shape of the recovery when liquidity does return to lending markets. Low base rates should speed up recovery when banks and building societies start lending again. The combination of -25% house price falls and lower borrowing rates will make housing much more affordable so demand should be strong when the worst of the recession is over.  This will cement the residential market upturn but not before 2010, or even 2011, depending on the length of recession and the state of consumer confidence.

In addition, low interest rates will make real estate investment look much more attractive as residential property yields become comparatively more appealing than gilts. If combined with falls in sterling, this could encourage overseas investors into the market earlier than we originally anticipated.

Savills Commercial 6.11.08

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