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Views of the low land

Paul Thomas assesses reaction to forecasts of low interest rates continuing for the next three years

The Ernst & Young Item Club last week forecast bank rate would stay at 0.5 per cent until the end of 2013 while Bank of England governor Mervyn King told the Treasury select committee it would be some time before bank rate returns to “normal” levels.

The Council of Mortgage Lenders says keeping bank rate low would give people struggling with their mortgage payments some breathing space and help them avoid going into arrears.

A spokeswoman says: “We would expect, on the basis of what has been said recently and policy measures that have been taken, interest rates to remain low, which would be good news in so far as protecting against arrears problems and lack of affordability.”

But she concedes that low rates create other problems for the market, particularly in terms of retail-funded lenders raising money. She says: “It does create its own difficulties, not least in terms of attracting savings inflows and ensuring that funds are available. The interest rate debate is not all good news but it is very good news for those with mortgages at the moment and as a protection against payment difficulty.”

Association of Mortgage Intermediaries director Robert Sinclair welcomes the prospect of an extended period of low rates, believing it will help prop up he housing market.

’Having low interest rates is great for the mortgage market but nothing is going to improve much until the availability of funding increases’

He says: “If rates stay at this low level for an extended period, that should underpin the housing market. It makes borrowing affordable, it should makes remortgages less attractive because the people on default rates will remain in a relatively benign position, so that helps affordability. Arrears and repossessions will be in manageable proportions so it is going to be positive.”

Sinclair believes the market has got used to stagnant transaction levels and continuing low rates would not really cause further damage.

He says: “The market has settled to dealing with the prevailing level of purchase transactions and remortgages that there are in the market-place today and interest rates, because they have been at the same level for over a year now, are in some form of equilibrium.”

But First Action Finance head of communications Jonathan Cornell does not think interest rates are the most significant factor in market perfor-mance at the moment.

He says: “It is a double-edged sword. Having low interest rates is great for the mortgage market but nothing is going to improve much until the availability of funding increases.”

Nationwide chief economist Martin Gahbauer cites access to credit and personal liquidity as the key factors driving property sales.

He says: “The question is what happens to consumer incomes and the tightness of credit conditions. There are quite a few challenges ahead on that front.

“Over the next two years, a lot of the emergency measures need to be refinanced, so I think a return to loose lending conditions is pretty unlikely. I think it will be a pretty low turnover market for a while, even if rates stay low.”

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