The recent cut in bank base rates was unexpected for many. Despite consistent calls from the manufacturing industry, there has been a prolonged resistance to reducing rates. One of the reasons for the recent decision was a perceived reduction in the outlook for growth in other parts of the economy as well, and in particular consumer spending.
The housing market was one of these sectors, although conflicting reports on increasing values and activity persist.
The bank rate cut of 0.25% will, of course, be welcomed by existing and potential borrowers. But it is unlikely, bearing in mind the continuing threat of war with Iraq, the lack of confidence in the stock market, forthcoming increases in National Insurance payments and council tax bills, to drive activity in the housing market, and of house prices in particular, up significantly.
It is interesting to note that the number of property transactions last year were the highest since 1988, at 1.5 million but were still 26% down on that year. Indeed, they were only up 9% on 2001, as we have not seen a boom in market turnover despite the lowering of the bank base rate to a 40-year low.
As important for house prices has been the relative lack of new supply in the market, with fewer houses being built in 2001 than any year since the Second World War.
For borrowers, whatever form of borrowing they are considering should be based not only on sustainable cash flow, but also with a view to being able to cope with increased interest rates at some time in the future.
In addition to taking a prudent view of their own circumstances, borrowers can often benefit from obtaining advice from specialists with a strong track record. Those specialists understand the markets they are in and should be able to ensure a rounded picture is presented.
The short answer is not directly. There is, however, a risk the consumer sector as a whole could become overstretched if base rates were to be reduced further.
The unexpected base rate reduction to 3.75% will increase the imbalances in the UK economy, by providing a further boost to consumer spending.
The level of consumer debt is already high by historical standards, and the availability of still cheaper credit will exacerbate this situation.
House price movements reflect a large number of factors, notably personal disposable income, housing supply and interest rates (base rates and longer-term fixed and capped rates). Personal incomes after tax are likely to increase in 2003 and 2004, although at a slower pace than last year.
Housing supply is a long-term UK problem, which will continue to exert upward pressure on house prices in many parts of the UK, into the foreseeable future.
The immediate impact of the base rate reduction will be to provide a modest boost to the housing market, at a time when housing demand is falling in the higher priced areas. Average house price inflation will thus ease at a slower rate than would otherwise have been the case.
We still predict a soft landing for the housing market in 2003, with average house price inflation of around 10% in 2003. The risk of a hard landing would increase if serious international tensions were to produce a significant fall in base and longer-term fixed rates ‘ increasing the borrowing capacity of consumer sector to unsustainable levels.
The reduction of the bank base rate caught everyone by surprise, not just those of us who work in the mortgage market.
The ‘informed’ opinion was that the next movement would be upwards, but perhaps we did not take full account of the need of the manufacturing industry to receive help to cut costs and avoid recession.
As far as the housing market goes, this cut in rates is irrelevant in itself as it is only 0.25% and the majority of borrowers will see little or no impact on monthly payments, with only those on tracker mortgages likely to see the full benefit. In a wider sense, the cut will not cause overheating in the housing market either.
The sensationalist headline writers are telling us the market is about to go into reverse, but this is nonsense.
The rate of increase in property values will slow but there will be no crash as long as the fundamentals of the economy remain sound.
At the moment, interest rates and inflation are low, unemployment is at a 27-year low and demand still outstrips supply to a significant degree, except in a few isolated hotspots which are clearly unrepresentative of the market as a whole.
The housing market is in good condition, despite the stories put about by news editors, and the long-term prospects are as strong and healthy as ever.