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Press Release Body: (7/12/2007) Amid signs of a slowdown in the economy, the Bank of England has cut interest rates to 5.5%, the first base rate cut since 2005. However it looks unlikely that this move will stop the deterioration of the housing market, which is now paying the price of inflated house prices - which have more than tripled since 1997 - and the easy availability of cheap debt.
Continuing the trend of recent months, house prices fell by 1.1% in November, the largest monthly fall in 2007 and, for the first time since 1995, the third successive monthly fall.
Though there has been much debate over whether UK house prices have been overvalued, many analysts now say they have been overvalued by as much as 30% - the figure given by the HSBC this week - placing the UK second worldwide in terms of the overvaluation of property (according to global rating agency Fitch). The inevitability of a slowdown following these inflated conditions has led to the criticism by leading economists that the Bank should have acted much sooner to stabilise the situation.
The rate cut is a step in the right direction, and further cuts are anticipated in January or February. While "the rate cut by the MPC is a good thing for the housing market," said Lawrence Smith of Decision Homebuyers, "we do not expect a jump in prices as happened after the rate cut in August 2005, since rates and house prices are starting from a much higher level." He said the cut "should make it easier for borrowers taking out a new mortgage or coming off fixed rates in the next year", conditions which should help the housing market.
The slowdown of the housing market has severe knock-on effects on many other sectors of the economy, not least consumer spending. Given the close correlation between house prices and consumer spending - around 80%, according to Michael Saunders of Citi European Economics - a sharp decline in the latter can be expected, and there are already clear signs of this as UK retailers face a critical test of consumer demand in the run-up to Christmas. Also, figures released this week showed that the services sector, which accounts for three-quarters of the UK's wealth, saw its slowest growth in four years and was close to stalling.
While the small rate cut will help to boost business and consumer confidence, and stave off a serious slowdown and the possibility of recession, some analysts think rate cuts won't necessarily help consumers (and house buyers) in the face of a credit crunch and banks cutting back on their lending.
Decision Homebuyers carries out daily surveys of the national media to provide up-to-date news and commentary on the UK property market.
Web Site: http://www.decisionhomebuyers.co.uk
Contact Details: For press enquires, please contact Lawrence Smith on 020 7099 9026. Email: lsmith@dhbuyers.co.uk Website: www.decisionhomebuyers.co.uk
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