Market waits for a fillip from feelgood factor

ANALYSIS
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The Independent Online
The move by mortgage lenders to cut the cost of home loans by a further 0.25 per cent yesterday, barely two weeks after their last reduction, should help boost the housing market slightly next year.

But the reduction in the standard rate, which brings the cost of home loans to their lowest point in almost 30 years, will not in itself stimulate the market.

For the reduction, spearheaded by the Halifax building society, to be effective, a more general return of the "feelgood factor" is needed, most housing experts believe.

Although interest rate cuts of about 1 per cent in the past year have slashed the cost of an average pounds 50,000 mortgage by up to pounds 40 a month for interest-only loans, the real problem faced by millions of borrowers is that of negative equity.

Some 1.5 million borrowers have mortgages that are greater than the value of their homes. Up to 4.5 million more are barely above that level, making it difficult for them to sell a home and buy another without incurring thousands of pounds in extra costs.

For a sustained revival, both the number of sales and prices themselves must go up together. Hopes of stable employment by millions of middle- class homeowners now in fear for their jobs, for example, are key to that process.

The Halifax yesterday said it hoped its own decision, which sparked the latest round in the mortgage price war, would nevertheless play a part in stimulating house sales. "It is not that there is a simple equation between low mortgage rates and a revival in the market," a spokeswoman said. "Homes are more affordable today than for many years. As we have seen, the important question is confidence not cost.

"Even so, we believe that a rate reduction will help increase that confidence. It may not be a cure, but it should be a hopeful incentive."

Don Smith, UK economist at HSBC Greenwell, said: "Every little bit helps. However, this move is not the answer in itself. It shows the keenness of lenders to see things moving, especially given some evidence of a slight recovery now. What lenders are hoping to do is throw a bit more fuel on to the fire."

The fall in the cost of loans is, however, already stimulating the recovery, some argue. Walter Avrili, operations director at John Charcol, the UK's largest mortgage broker, claimed: "Since September, when the first of the round of cuts went through, we have seen increasing levels of business, particularly among new property purchasers, rather than re-mortgages. Yesterday's further reduction can only help."

The Royal Institution of Chartered Surveyors also argued the mortgage cuts would assist recovery: "Where most factors for progress are already in place, confidence is everything. Next year looks like being one of low inflation, stable employment and growing consumer spending. [This provides] the foundations for an upturn."

Rob Thomas, a housing analyst at UBS, the Swiss bankers, was alone in predicting two weeks ago that lenders would reduce their rates even further in the wake of base-rate cuts. Mr Thomas said: "This will help, but not very much by itself. If we go back to a year ago, when people were expecting an increase, house sales were higher than today. Obviously, transactions lag behind prices, so we will have to wait for a few months to see what the effect of yesterday's decision is. The jury is still out."

Mr Smith added: "A growing level of transactions should, in time, help push up prices. Whether that will be by much is another question. In a low inflation environment, we should not be expecting an Eighties-style boom. It is doubtful whether . . . with the inflationary spiral out of the way for the next 7 to 10 years, we will see house prices increase at the same rates they once did."

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