Assetz® News - Inflation deflating

Inflation deflating

14th October 2008 |

With the last few days seeing widespread government action to bolster banks - a move copied overseas - plus a half point base rate cut, it seems there is now some optimism in the UK property market.

Such an upbeat view - albeit a cautious one - has even been expressed by those still monitoring the symptoms of the recent sickness before Brown and Darling's medicine arrived. For example, the Royal Institution of Chartered Surveyors (Rics) cannot, on the face of it, have had too much to celebrate after seeing the average number of transactions per surveyor fall below one per week. But a hint of optimism was expressed by Rics spokesman Jeremy Leaf.

He said: "The recent turmoil in the financial markets has dented confidence further but yesterday's announcement by the government that the re-capitalisation of banks will be accompanied by increased lending to homeowners, raises the possibility that the lack of mortgage finance that has so damaged the housing market might be eased."

Similarly, there were the words of Nicholas Leeming, managing director of property portal Findaproperty.com, who was commenting on the news that the Council of Mortgage Lenders had recorded a year-on-year fall of 63 per cent for mortgages to buy homes in August. While this was not good news, Mr Leeming noted, there is hope.

He stated: "This week a faint glimmer of hope has begun to emerge at the end of the credit crunch tunnel. It is early days, but interbank lending rates have begun to creep back down on the back of recent measures and in time this should feed through to help free up mortgage availability."

Of course, such guarded language may not be surprising, given recent uncertainties. Mr Leaf was also balanced in his view, cautioning that the property market may remain a "dormant beast" if liquidity does not improve significantly after everything that has been done of late.

But there may be further possible boosts on the way soon. Today did see the Office for National Statistics publishing inflation figures for September showing consumer prices index (CPI) inflation at 5.2 per cent. But it is already known that the Bank of England's monetary policy committee (MPC) expects this to fall and yesterday one of its members, Andrew Sentence, predicted that just over five per cent would be as high as CPI will go.

Forecasting a fall in the rate in the coming months - possibly to the point of undershooting the two per cent target - Mr Sentence said some factors that had caused inflation to persist in the past are largely absent now. These include high wage inflation and an imbalance between the growth of the supply of consumer goods and the increase in the money supply - or "too much money chasing too few goods".

With oil prices also falling, Mr Sentence suggested that the MPC "can be much more confident than we were a few months ago" about inflation falling. This being the case, the prospects for further base rate cuts soon - and with it lower mortgage costs for homebuyers and buy-to-let investors alike - may be growing all the time.