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The start of a mortgage recovery?

23rd October 2008 | back to article listings BACK    print this article PRINT

With this week featuring both the Bank of England governor and the prime minister predicting that Britain is heading into a recession, it may seem as if there is little good news about that could encourage investors in the property market.

Then, however, came the British Bankers Association (BBA) lending figures for September. These indicate that the level of mortgage lending actually rose during the month, with the value of loans for home purchases up from £2.8 billion in August to £3.2 billion. Moreover, the total number of approved mortgages also increased, from 21,342 to 23,422.

Of course, it might be easy to dismiss this as just one month's figures - perhaps as a blip, perhaps a figure distorted by the uncertainty over stamp duty. Certainly the September figure is lower than the six-monthly figure and BBA director of statistics David Dooks noted that it represented "continued low levels of mortgage lending".

Yet Mr Dooks also noted that the figure predates the recent recapitalisation that has occurred in the banking sector, with the potential this and the extra liquidity being pumped into the system may have for bringing down interbank rates and boosting mortgage lending. Therefore, the September figures might turn out to be a prelude to further improvements which have a more concrete reason for occurring.

That concrete reason - that of lower mortgage rates - may have been provided by the Bank of England's monetary policy committee, economists have suggested. Reviewing the minutes of this month's meeting at which the 0.5 per cent rate slashing was agreed, experts have suggested the situation clearly points the way towards more cuts.

Vicky Redwood of Capital Economics said: "Not only did all members vote for the 0.5 per cent cut, but the discussion was unambiguous. The case for leaving rates on hold - or indeed cutting by 0.25 per cent - wasn't even discussed."

Ms Redwood suggested this indicates a prospect for more "aggressive" rate-cutting, a view also held by Global Insight's chief UK and European economist Howard Archer, who commented: "We expect to see a 0.5 per cent cut to four per cent in November."

Ms Redwood went further, suggesting the base rate could even drop to two per cent eventually, a figure which would break the record for the lowest rate (2.5 per cent) set in 1951.

With the rate where it is, the Bank of England does have plenty of scope for cutting the base rate, far more, for instance, than the US where the Federal Reserve has already reduced its rate to just 1.5 per cent. For those looking to see the cost of borrowing come down, there could be plenty of dramatic news ahead.

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