Economic woe deterring sellers

19 September 2008
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.”

Interest rates

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.”

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