Assetz® News - Rate pressure builds as prices fall

Rate pressure builds as prices fall

28th January 2008 |

Proof, were it needed, that the property market has slowed has come in the shape of falling house prices. Survey after survey has shown small monthly drops in house prices, leaving values still well above where they were in the past, but moderating a market that had been booming.

Nothing but further confirmation of this trend has emerged today, with property portal smartnewhomes.com revealing that the price of the average new home in London fell by 4.1 per cent in December and is actually now nine per cent cheaper than a year ago. Unfortunately for many first-time buyers, the average price of such dwellings is £420,983, £181,000 above the average first-time buyer price.

Another set of statistics, the Hometrack survey, showed a fall of 0.3 per cent nationwide in the month up to mid-January. This was the fourth successive fall it had recorded and the consequence was a reduction in the annual rate of house price inflation to 2.3 per cent, the lowest figures since June 2006. Along with this was the news that the average time a home is on the market before a buyer is found has increased to 8.5 weeks, the longest period recorded since Hometrack's research began in 2001.

Responding to the news, Richard Donnell, Hometrack's head of research, pointed out the amount prices had fallen by was "relatively small" compared with the soaring prices of the last few years. But the future, he said, was not certain.

He stated: "The short-term outlook for market activity hinges as much around the outlook for UK interest rates as it does the outlook for financial markets."

The interest rate situation may not be as clear as some imagine. On the one hand, the Bank of England monetary policy committee (MPC) cut rates by 0.25 per cent on a unanimous vote in December, admitting in the minutes that consideration was even given to a 0.5 per cent cut.

At that time the MPC stated there were major fears about falling growth in the economy, which may have prompted property investors to expect the boost of another rate cut soon. However, the eight to one vote to hold in January, while continuing the MPC practice of not cutting rates in successive months, was based on the statement in the minutes that the inflation situation had "worsened markedly".

Today, the Guardian published an interview with Professor David Blanchflower, the well-known MPC dove who was the odd member out this month. He told the paper that in his view the 5.5 per cent rate was "too restrictive". Suggesting that to hold back from a rate cut due to fears about inflation would be rather like "fiddling while Rome burns", he suggested a cut was vital to bolster economic growth.

The suggestion by Professor Blanchflower that the MPC should "lead, rather than follow" may suggest a sense of exasperation with his colleagues, perhaps even a belief that the instinct of the rest of the MPC could be to hold rates in February after all.

This may, of course, not be the case at all. It could be that enough of the committee agree that a further trimming of the rate to 5.25 per cent is due when they meet on February 6th and 7th to carry the day. But on the other hand, it could just be a hint that the cut many expect is not a certainty. In the January minutes the MPC stated that they would have the latest inflation forecast data to hand. That information may be decisive.