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Rate cut won't impact property market

Catherine Deshayes

Despite being much needed and much welcomed, the interest rate cut by the Bank of England is likely to have little impact on the UK property market...

Whilst yesterday's 0.5 per cent interest rate cut will help to restore some level of confidence in the market, and have some positive effect on the economy, the extent of the impact on the housing market could be limited.

According to Savills, it is a lack of availability of funds that is having the biggest impact on housing demand, and the interest rate cuts may not be able to solve that problem. Whilst the cut will benefit those with tracker mortgages, more than half the borrowers in the UK, who are on fixed rates, will still be struggling.

Whilst the cut in interest rates could be key to economic recovery, the key to a housing market is the recapitalisation of lending institutions.

Yolande Barnes, Director of Savills Research says, "The best we can hope for in the short term is a reduction in the unprecedented rates of house price falls.

"Over the medium term it may curb the extent of the downturn although the most likely outcome is that it will improve the prospects of a return to house price growth in 2010/2011," she added.

Most experts agree that more action is needed and are calling for further interest rate cuts.

Simon Rubinsohn, Royal Institute of Chartered Surveyors Chief Economist, says, "This should help to start the process of rebuilding confidence but we suspect that more action will be necessary over the coming months.

"House prices are likely to continue slipping but homeowners should get some respite in the form of lower borrowing costs," he added.

According to mform.co.uk, an on-line mortgage company which allows borrowers to search the whole market for the best products, the interest rate cut will only help if lenders start lending again.

"Mortgage availability and the willingness of lenders to lend remains one of the key factors behind a revival in the housing market as the interest rate cut will in effect only put would-be borrowers back where they were last month in terms of affordability of home loans," the online mortgage company says.

Rates across all products have been edging up in the past weeks with Abbey raising rates yesterday, October 8^th. The Bank of England cut in coordination with the bail-out plan needs to deliver both lower rates and access to mortgages if it is to succeed.

Francis Ghiloni, Marketing and Business Development Director at mform.co.uk, says, "Lenders have cut rates in the past only to take fright at the financial instability.

"They have to cut again and make it easier for people to borrow. That is the only way to revive the housing market and also boost the wider economy.  

"We have to see whether this translates into increased lending. The Chancellor's bail-out deal with banks had a condition that they should make funds available to mortgage customers and small businesses," added Mr Ghiloni, who is hoping to see another interest rate cut next month.

Chris Baguley, Managing Director of niche lender Bridging Finance Limited, which arranges bridging loans for property investors, says that he doubts the cut will make a ‘scrap of difference to the housing market.'

"The last time an emergency response like this was made was after 9/11. It worked then but his time round the key issue is the confidence of the banks.

"They need the confidence to lend to each other so they can have a more positive approach to new business to enable them to trade through the current problems.

"I doubt the half a percent cut will stimulate the housing market immediately but it is a step in the right direction. The stock market's response will be telling for the housing market," added Mr Baguley.

Stewart Baseley, Executive Chairman of the Home Builders Federation called for further action from the Bank of England if the vicious downward spiral of sharply lower mortgage lending, falling housing transactions, falling prices and declining home buyer confidence is to be stopped.

Dominic Agace, Managing Director of Estate Agents Winkworth highlighted the short term measures that the cut would have. "Winkworth welcomes the news that the Bank of England has cut their interest rates by half a percentage point.

"This measure, combined with today's announcement of some £250 billion worth of aid to the banking system, will help to alleviate the cost of debt and provide liquidity to the market, helping those struggling to attain mortgages or those looking to re-mortgage .

"This interest rate cut will take time to feed through. However, the shorter term benefits of an improvement in market sentiment will provide a short term boost to those wanting to buy their next home," he added.

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