Assetz® News - Not the last cut

Not the last cut

5th December 2008 |

For some investors in property, yesterday's Bank of England decision to trim the base rate by one per cent to its lowest level since 1951 was automatically good news. These people, of course, were those who had bought part or all of their portfolios with tracker mortgages.

The effects of the cuts made so far this year was to put £1 billion back into the pockets of such investors, property portfolio firm Young Group's managing director Neil Young said earlier this week. Following the latest reduction, the saving is now up to £1.4 billion, the firm noted yesterday. So for many there has already been a direct gain and in terms of property investment some of these buyers may feel the extra money in their bank accounts will make further acquisitions possible.

Such a move may be particularly profitable as the economy continues to dip and with it house prices. The latest Halifax house price figures, released earlier this week, showed that in November prices were down by 2.6 per cent, while the annual drop was 14.9 per cent. Halifax chief economist Martin Ellis pointed out that this has improved affordability, with the ratio of house price to annual earnings now down to 4.56, the most favourable for over five years. But of course the pressure of the recession may curb new buying, with mortgage finance still hard to obtain for many and others not feeling financially secure enough to undertake such a major investment.

Therefore, for now investors looking for bargains may be the greatest beneficiaries of the continued fall in house prices. While the rate cut is "welcome", it is getting the banks to start lending again that will make the main difference to the overall market, Association of Mortgage Intermediaries director general Chris Cummings said yesterday.

By cutting rates, the Bank of England has expressed the hope that it will not only avoid an undershoot of inflation targets but help bolster the economy (the two being symbiotic in this case), with the desire being that the action they have taken will help these goals be achieved. Those hoping for further action of this kind should be able to look forward to it, according to Global Insight's chief UK economist Howard Archer. He stated: "We now expect interest rates to fall to a low of 0.5 per cent in the second quarter of 2009 and then stay there for the rest of the year. However, it is not inconceivable that interest rates could come all the way down to zero."

For those keen to see borrowing costs fall further, this will be music to the ears. In the longer run, however, what matters is that these actions - plus other measures by governments and central banks - will help the economy recover from recession and in turn stimulate a better property market with more mortgage lending. Then those who are able to invest in property at bargain prices now will be able to feel the benefit as prices start to rise again.

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/4524.html. Alternatively, please see our full press release archive.