Newsletter December 2007UK interest rates trimmed to 5.5%
The Bank of England has cut UK interest rates to 5.5% from 5.75% amid signs that the economy is slowing.
Expectations of a rate cut had risen in recent days after figures indicated that economic conditions had deteriorated over the past few weeks.
The BBC's economics editor Evan Davis said the rate cut - the first since August 2005 - was aimed at preventing the slowdown getting out of control. Mortgage lenders Halifax and Nationwide cut their rates in line with the move. Financial website Moneyfacts said that lower borrowing costs would save between £15 and £20 a month on a £100,000 mortgage.
Experts had predicted that some lenders may not pass on the rate cut in full to consumers. However, the speed of the response from the UK's two largest mortgage lenders will now put their rivals under pressure to follow suit.
"A reduction in interest rates is exactly what the market needs and will benefit consumers," said Michael Coogan, director general of the Council of Mortgage Lenders (CML). "This will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year."
Chief economist at Lloyds TSB Corporate Markets, Trevor Williams, said that the Bank of England's decision to cut rates had been an "incredibly tough one". He said that worries about inflation, with rising food and oil prices, "could easily have swayed the Bank to hold rates".
However, surveys this week have shown falling house prices and a slump in consumer confidence. On Wednesday, Halifax reported that UK house prices dropped 1.1% in November, while Nationwide showed that its measure of consumer confidence had seen the biggest monthly decline since the survey began in 2004. A number of retail and leisure companies have also warned of problems and that they are seeing a slowdown in demand on the High Street.
Our economics editor said that Thursday's rate cut was aimed at making sure the economy did not slow too quickly.
"It is about making sure that the slowdown, which seems to be happening, does not get out of control," he explained.
Another of the key factors behind the rate cut was an increase in Libor - the rate at which banks to lend to one another. Libor has been rising because of problems in the US mortgage market and the subsequent credit crunch, and the fear is that this will make banks less willing to lend to consumers and companies.
Analysts said the Bank should worry about growth not inflation. "The credit crunch - which seemed to be resolving itself in October - has recently taken a nasty turn for the worse," said Peter Spencer, chief economist of Ernst and Young's Item Club.
EEF, the manufacturers' organisation welcomed the rate cut. "Though manufacturing remains in good health a number of warning lights for the economy are now flashing amber," said Steve Radley, EEF's chief economist.
"This is a sensible pre-emptive move which will reassure business that the bank is on the case and help to cushion the economy from the worst effects of instability in the financial markets," he added.
The British Chambers of Commerce (BCC) praised the MPC's "commendable flexibility" saying the rate cut would help to alleviate potential dangers facing the economy and give a much-needed boost to business confidence.
"A cut in rates was clearly needed to counter the growing international threats emanating from the US, and to unblock the dangerous obstacles preventing the banking system from operating smoothly," the BCC's David Kern said.
"Threats to growth are much bigger now than risks of higher inflation."
Mr Kern added that if credit conditions remained too tight, a further cut in rates may be required early next year.
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Tenant Demand in the Private Rented Sector at Highest Levels for Five Years
ARLA Members Survey of the Buy to Let sector - Fourth Quarter 2007
Tenant demand in the Private Rented Sector remains at the highest levels seen for five years. This has led to an increase in rents achieved, according to the latest quarterly survey of member letting agents, published by ARLA.
Two thirds of the letting agents in prime central London report they have more tenants than there are properties available to rent. This is echoed throughout the South East, where the same lack of property is reported by 57% of the letting agents. In the rest of the country, 37% are reporting rental property shortages.
The most dramatic turnaround in the balance between supply and demand between prospective tenants and available property is reported in Prime Central London. There, the increase in demand over supply has increased thirteen fold in the past five years.
In the rest of the South East, demand has risen six fold and has remained relatively static in the rest of the country.
“This peak demand should come as no surprise,” said Ian Potter, Head of Operations for ARLA. “It has been driven up by the many competing demands for rental accommodation and now we have softening house prices. Softening in the sales market is always a driver of further demand in the rental market.”
The ARLA Survey shows that achievable rent levels have been increasing over the past six months. Rent levels throughout London and the South East are considered to have risen very significantly, with the majority of letting agents reporting increases. Elsewhere in the country, up to 54% of all letting offices report increased rents achieved.
Tenants continue to stay in properties for well over a year, regardless of the length of their initial agreement which is commonly for six months. Void periods remain at well under a month. This decline in the length of time properties are empty has been declining steadily from an average of nearly five weeks.
Said Ian Potter, “These latest figures confirm that the private rented sector will once again be the safety valve for a housing market worried by the current financial uncertainties and the softening of house prices. It is the rental market that houses the massive numbers of immigrants, the increase in single households and more students in higher education.”
Meanwhile, more than seven out of ten letting agents report that the latest survey shows investment landlords are marking time before making buying or selling decisions. As a result, the proportion of investment landlords who are selling has fallen from 21% to 16% and buying from 16% to 11%.
This pattern was last seen in 2004/5 before the proportion increasing their investments rose rapidly in 2006.
The ARLA Survey of Letting Agents is based on responses drawn from 517 letting offices. This makes the survey the largest and most authoritative of its kind in the private rented sector.
RICS UK Housing Market Survey October 2007
The RICS house price balance declined at the fastest pace since July 2005 but limited supply is still propping up the market, says RICS’ UK Housing Market Survey.
Surveyors reported that house price growth remained negative for the third month in succession. 22.2% more Chartered Surveyors reported a fall than a rise in house prices, down from 14.9 in September - the fastest decline in sentiment since July 2005 when 30.9%Chartered Surveyors reported a fall than a rise.
However, new instructions declined for the fifth consecutive month. 17% more Chartered Surveyors reported a fall than a rise in new instructions to sell property.
Those on the property ladder remain under little pressure to sell while the economy remains fundamentally sound. The supply side of the market remains tight and continues to provide some support.
Interest rate rises, the recent credit crunch and the subsequent tightening of lending conditions have all had an impact upon demand.
New buyer enquiries declined for the 11th successive month with 41% more Chartered Surveyors reporting a fall than a rise.
Weak demand has pushed the stock of unsold property up at the highest pace since May 2003. The stock of unsold property per surveyor rose to 64.9 compared to 59.7 in September. Consequently, market conditions are the loosest they have been since May 2006. The ratio of completed sales compared to the stock of unsold property on the market fell to 35.7 % from 38.3% in September.
Surveyor confidence in house prices reached the lowest level since April 2003. Recent market conditions are still having a depressing effect on market sentiment. Surveyors in East Anglia reported the largest price falls followed by the West Midlands, the South West and East Midlands and Wales. London was the only area where surveyors did not report a fall.
RICS spokesman Ian Perry said:
"The housing market is seeing the awaited slowdown that many had been expecting, with modest falls reported across most UK regions.
"A decline in transactions may be in the offing as stalemate returns to the market, although a material fall in prices would require a weaker labour market prompting forced sales.
"Credit market turmoil has yet to put downward pressure on prices in the capital although prices have now stabilised even here.
"Significantly, London is the only region where new instructions have risen over the last two months indicating that more leveraged buyers at the margins may already be feeling the credit squeeze."
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