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Rate cuts will not rebuild the housing market
Independent on Sunday, The, May 11, 2008
Meanwhile in the UK, it was a week of an interest rate decision. There was some weak economic data (a fall in industrial production, indications of weaker demand for services and solid evidence of falling house prices), so when the Bank of England did not move rates down, there was the usual flurry of concern.
Actually, the precise timing of interest rate movements matters very little and the markets now expect another quarter point off next month. What needs to be remembered is that the lag between a significant change in rates and any effect on the economy is both uncertain and long.
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The easing of the cost of borrowing this spring will have some bearing on the economy next year, but save for one element - the impact on sterling - we won't see much effect in the next few months. Lower rates will feed some money into household budgets, assuming lenders keep in step with a cut in mortgage rates, but this will have only a marginal impact on the housing market. The problem there is not the price of a loan, it is whether the borrower can get one at all.
If housing is undoubtedly weaker than expected, consumer demand seems to be holding up. People say they lack confidence but they don't seem to have made radical lifestyle changes. They are upset that inflation in the basics - food and fuel - has risen much faster than inflation in the shops. There's no money to buy the things they'd like to buy because so much is going into things they have to buy. And while food and fuel may come back down, they are unlikely to fall to the level of a year ago. So while the economy is growing, real incomes are not.
I suppose you could say that while overall growth is running at pretty much the level expected - somewhere between 1.5 per cent and 2 per cent a year - the state of the housing market is worse. In the past three months, the Halifax index has fallen at an annual rate of more than 15 per cent. You can see why the pressure will mount on the Bank to make further cuts. It will, but do not expect it to have any immediate impact on house prices.
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