Housing market fuels BoE rate cut move


Expectations that the Bank of England (BoE) will cut interest rates by a quarter percentage point to five per cent at the monthly meeting of its Monetary Policy Committee (MPC) today were reinforced by the latest figures about the housing market. Many analysts in the city are bracing themselves for a cut.

The market here in London reacted with a bit of shock to the latest report from the largest UK mortgage provider, Halifax, about house price fall last month. Though such monthly figures fluctuate, the report came in line with other big lenders’ estimates for property mortgage inflation in the first quarter of this year.

March witnessed the biggest monthly drop in house prices in 12 years, falling by 2.5 per cent, according to Halifax. This brings house price inflation this year, so far, to slightly more than 1.0 per cent in parallel with other mortgage lenders’ expectations.

There’s a growing fear that UK property market might catch the virus spread in the United States causing a property crash combined with a sub-prime mortgage crisis reverberating globally causing a credit crunch.

Analysts and business media are drawing analogies already with the property crash of early 1990s as they see banks and building societies tightening the rules for mortgage lending.

Many lenders are now withdrawing some of their mortgage products, like those with discounted rates or other incentives. Others already stopped lending first-time buyers hundred per cent mortgages asking for a down payment of five to 10 per cent.

But these are precautionary measures by banks suffering a cash squeeze due to the global credit crisis, according to business analyst Rafle Khoriati. “There’s no need to panic, as UK housing market is not going to crash like that of the US,” he said citing the good fundamentals of the British economy as reasons to consider a soft-landing in property prices. 

Though nobody is forecasting a contagious spread of the property crisis across the Atlantic, an annual house price fall of between eight and 12 per cent is expected this year.

“The property market in UK is already saturated, and correction is inevitable even if it’s not on the scale of the US hard-landing” says businessman and ex-banker Hameed Husain.

“Property, especially commercial property, is still undervalued in Scotland and Northern Ireland”.

The bubble in global property prices is bursting, in US Spain and other parts of the world, but the degree of fall is different.

With relatively sound growth and yet a good employment rate in the United Kingdom, house price crash seems a bit far though not completely ruled out. Buy-to-let segment of the market traditionally prop it up in times of crisis.

That segment is undergoing a lull, according to Husain, as mortgage providers are more cautious now to lend investors in property. But investment in property is still viable, as Khoriati estimates, with the buy-to-let market in plateau and not falling down yet.

As for home owners, market conditions are squeezing their spending power – most likely having a negative impact on economic growth rate in an economy with consumer spending more than half its GDP.

Interest rates might be relatively low, but it is still a percentage more than Euro zone and double that above US rates. BoE has got a hot potato in its hand with the need to cut rates to induce economic activity and the inflationary pressures holding its hand, as consumer inflation is persistently above the official target of two per cent.