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Rate of growth

Nicola York assesses the mortgage industry’s reaction to last week’s 0.25 per cent rate reduction by the monetary policy committee

Lenders and mortgage brokers are hoping the small cut in the Bank of England base rate will boost confidence in the property market and encourage first-time buyers.

BM Solutions PR manager Matthew Grayson believes confidence will filter through to consumers quickly but the housing market will take longer to react. He says: “It will be interesting to see the viewing figures over August and whether the cut creates the kind of movement that is needed at the lower end of the market and first-time buyers in particular.

“The rate cut will obviously help exporters, who will find themselves more competitive in the international markets, so it does turn up the heat a little in the economy and will breathe some new life over the short to medium term.”

The quarter-point drop was prompted by the economy’s slowest growth rates for nearly a decade after the base rate had been held at 4.75 per cent since August 2004. Grayson does not think this is the start of a series of cuts and foresees rates staying at 4.5 per cent until perhaps early 2006, when the rate may return to 4.75 per cent depending upon data.

John Charcol senior technical manager Ray Boulger says: “The cut is likely to stimulate the first shoots of recovery in the housing market and I expect to see a significant change of mood over the next few months. The pendulum will swing from a buyer’s market to equilibrium and then by next spring to a seller’s market.”

Boulger thinks fixed loans have further to fall and says there could be some “mouth-watering” fixed-rate deals towards the end of the year.

Hometrack chief housing economist John Wrigles-worth says confidence in the housing market has been improving in anticipation of the rate cut and he expects it to improve further now the cut has been confirmed. He thinks the property market will recover over the next few months. He says:”It will not be a boom but the malaise, the stagnation and the transactional gloom we have had over the last seven or eight months will disappear, because transactions are still about 30 per cent lower than they were at the beginning of last year.

“In transactional terms, the housing market has gone through a bit of a crash if you like, but not in price terms. I think that, as a result of this interest rate cut, we might see transactions improving in the market so overall it is good news for housebuyers.”

Wriglesworth does not predict more cuts in the immediate future and thinks rates could stay level for the rest of the year but believes the next move could be down, depending on what happens in the economy. In terms of transactions and pricing, he sees the impact of the cut taking a couple of months to filter through.

Research from Mortgages Direct shows that 93 per cent of borrowers are opting for fixed-rate deals of two to five years. Director Peter Gladdy says: “Although interest rates have dropped, consumers are clearly showing little confid-ence they will remain low.” Mortgages Direct also reports a rise in first-time buyer mortgage applications from 35 per cent in April to 42 per cent in July.

Chase de Vere Financial Solutions savings manager Susan Hannum says: “Prices are too high and things have to calm down so we can get first-time buyers back in to the market and this is basically what this cut is all about. It is to try and help first-time buyers to get on the market but not to fuel the market enough to get the sort of ridiculous rises we have seen over the few years.”

Hannum says the drop is unlikely to signal the start of a whole series of cuts because “otherwise they are going to go round in circles”. She says: “There should have been a lesson learnt in some respects because people have overspent and they are tightening their spending so I think this is probably a case of testing the water. If it does not work, then we might see another cut. I think another cut is more likely to happen by the end of the year.”

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