Economic woe deterring sellers
The government’s stamp duty incentive appears to have failed to kick-start the housing market with the general economic climate still deterring sellers from putting their properties on the market.
The latest figures from online estate agency Rightmove shows the number of new properties on the market priced at under £175,000 has increased by just 0.5% - just 1,029 - during September, despite the government upping to nil-rate stamp duty band to this amount.
Estate agents are reporting the lowest ever number of new properties for September, normally a busy month after slow August. As a result, the number of unsold property decreased for the first time in seven months.
Despite the slowdown in the number of new properties coming onto the market, the buyers market is still going strong with sellers on average dropping their asking prices by over £2,300.
Rightmove says the property market remains in a highly weakened state with little chance of recovery until banking turmoil and credit crisis abates. It also warns that the latest round of financial woes – including Lloyds TSB’s rescue of HBOS and the collapse of Lehman Brothers – are a further blow to house prices although the longer term implications are still unclear.
Miles Shipside, commercial director of Rightmove, says: “The housing market is on its knees and will remain so until financial institutions address the disastrous state of the mortgage funding markets. We are now seeing the lowest level of new sellers for years.”
For some time, economists have been predicting an interest rate cut before the end of the year, but new signs that inflation may be near to peaking have sparked hopes that the Bank of England could act sooner rather than later.
Last week, the minutes from the central bank’s Monetary Policy Committee (MPC) revealed that while only one member voted for a cut (David Blanchflower) there were no votes for an increase. In addition, the eight members that voted for a hold admitted there were signs they should focus less on inflationary concerns and more on the downturn to the economy by cutting rates.
For example, demand has slowed, financial conditions remain stressed and although some slowing in demand was necessary to bring inflation back to the target, most members thought that the risk to the health of the economy had increased.
Andrew Montlake, a partner at mortgage broker Cobalt Capital, says Blanchflower is right to vote for a cut. “With demand dropping, inflation will fall of its own accord and what the economy, markets and sentiment need right now is a boost,” he adds. “The longer we delay cutting rates, the longer and deeper the crisis we’re in will be.”
And Jonathan Loynes, chief European economist at Capital Economics, says the minutes suggest an interest rate cut is close – especially as Blanchflower has increased his suggests of a cut from 0.25% to 0.5%, while Tim Besley reversed his recent calls for an increase.
“Admittedly, the MPC still discussed the case for a hike and most dismissed a cut on the basis that it would suggest that the MPC was putting “undue weight” on activity indicators,” Loynes explains.
“Nonetheless, the MPC now seems to have a slight loosening bias which is likely to have been strengthened by events since the meeting, not least news of a rise in unemployment of over 32,000 in August.”
But will an interest rate cut have much bearing on mortgage rates and people’s ability to get a loan?
Not necessarily. Fixed-rate mortgages have been falling of late, with several lenders chopping their prices. This reflects cheaper swap rates, the money lenders borrow to fund fixed-rate loans.
Swap rates are set according to interest rate expectations. The reason swap rates have fallen of late is down to the general expectation that interest rates will fall – i.e. the markets have already priced in an interest rate cut.
Therefore, when/if interest rates are reduced, lenders may not find their funding gets any cheaper – and may be unable to pass on any benefits to borrowers.
In addition, the price of mortgage isn’t the biggest barrier to home ownership at the moment – confidence, and the need for a large deposit, are two of the main reasons why many people are unwilling or unable to buy.
Rightmove’s Shipside says: “While the Bank of England may bring forward a cut in its base rate, it seems unlikely that this will have much impact on mortgage availability or mortgage rates in the short-term.”
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).