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Delicate balance

You do not need a crystal ball to predict that UK interest rates are going down. After monetary policy committee decisions to cut rates in December and February, the debate for many is now simply about how much more and how quickly rates are going to be cut.

Many commentators were disappointed that the MPC did not reduce the base rate by 0.5 per cent at its February meeting and accused the Bank of doing too little too late. They want to see a programme of aggressive cuts from the current 5.25 per cent and they argue that reductions are vital for the struggling property and mortgage markets.

Every MPC meeting that passes without a rate cut being announced is, for some, another opportunity lost to avert the risk of recession. It is not hard to drum up justification from the welter of UK housing market indicators, all of which show either price rises slowing or prices falling in many parts of the country.

Take the most recent from the Royal Institute of Chartered Surveyors. It rep-orted a lack of demand and confidence. According to surveyors, the only part of the UK where prices are rising is Scotland. The stock of unsold properties on surveyors’ books has increased by more than 40 per cent since September 2007.

So, the future is clear and the future is more cuts? Well, up to a point. The future is probably further reductions in the base rate over the rest of the year but rash cuts are unlikely. Any cuts in the base rate have to be controlled and balanced against the risk of increased inflation.

Major cuts would arguably help the economy but inflationary risks mean shock tactics could be unwise. Retail sales figures show consumers are feeling the pinch and that tighter credit conditions have reduced demand. However, rising prices for food and energy mean inflation has not gone away despite the recent drop in oil costs. The BoE’s medium-term target for inflation is 2 per cent and that discipline remains important.

Short-term jitters in the housing market do not mean that the market is in freefall, with the return of negative equ-ity and a housing market meltdown. The property market on its own is not an argument for dramatic cuts. Whatever happens to the property market, we have had a prolonged per-iod of rising prices and those on the property ladder have reaped substantial financial rewards.

Research by GE Money Home Lending has established that British homeowners have an impressive £1.96trn of equity in their homes. That adds up to an average of around £127,455 for each property.

These are impressive figures – and ones consumers should bear in mind when they read the latest news about house price falls. House price indices may vary month by month but relatively small percentage drops will barely dent the £1.96trn of housing equity.

Taking the longer view gives a more positive – and more realistic – picture of what has been achieved by the mortgage industry for consumers and what householders have achieved for themselves by taking out mortgages.

The year ahead may be challenging for the property market with more house price falls to come but the mortgage market is solidly underpinned and consumers who are already on the housing ladder should remember they have had substantial financial rewards. Those who are enabled to get on to the housing ladder by house price falls will also benefit.


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