Assetz® News - Strong property market freezes interest rates

Strong property market freezes interest rates

9th February 2006 |

As has been widely anticipated in the last few days, the Bank of England has decided to keep interest rates at 4.5 per cent, with the strength of the property market a key reason behind the decision.

After the interest rate cut in August 2005, the property market almost immediately showed signs of recovery and confidence has been steadily rising ever since.

While first-time buyers had previously been reluctant to commit to any property purchases, Yorkshire Bank found this week that they are now willing to overpay to ensure they secure a place on the property ladder.

It seems that while those in the property investment business will be generally satisfied with the decision to freeze rates, manufacturers will be less pleased. Recent figures from the British Retail Consortium (BRC) indicated that like-for-like sales on the High Street had climbed only 0.2 per cent in January, which represents the slowest start to a new year that retailers have seen for more than a decade.

It is in fact the remarkable resilience of the property market that has given the Monetary Policy Committee (MPC) the biggest headache in making this decision, as none of the members had been expecting the recent recovery in the housing market to be so pronounced.

Nationwide building society has reported that house prices increased by 1.4 per cent in January, while the Council of Mortgage Lenders (CML) observed that the previous month was the busiest December on record for mortgage lending. A series of recent reports have shown that buyer confidence is currently high and it is this evidence that has persuaded the MPC that cutting interest rates could potentially lead to the property boom that all members are eager to avoid.

"The main puzzle for the MPC remains the bizarre rebound in the housing market, both in activity levels and prices. Most analysts believe this is due to the August rate cut and many on the MPC will be anxious to avoid encouraging property prices to take off again when they have only recently made a soft landing," said a report in the Guardian.

Despite the current health of the property market, some experts in the industry have reacted with disappointment to the decision not to cut interest rates. While activity levels and house price increases may currently be beyond the wildest expectations of many property investment specialists, some were looking for yet another boost with a further cut today.

"The number of first-time buyers in the market has risen slightly this month, but this could just be a seasonal adjustment," speculated Paul Smith, chief executive of haart estate agents.

"We urge the Bank of England to reduce rates by a quarter per cent within the next few months. As debt repayments would then be lower, consumers would have more disposable income which would as a result, benefit the entire economy," he added.

Most analysts are predicting that this is exactly what the Bank of England will do. Such a move will push house prices up again and investors will be expecting impressive returns across the country, with the north and north-west leading the way.