Despite evidence of a clearly weakening economy the Bank of England is more concerned by the perceived danger of inflation resurging and is sticking to its remit of keeping inflation at around 2 percent.
These are the views of real estate services and money management company Jones Lang LaSalle following a decision by the bank’s Monetary Policy Committee to maintain interest rates at 5.25 percent last week.
Tony McGough, Head of EMEA Real Estate Forecasting & The Economy said: “Fundamentally there have been enough signals of a weakening economy to support a cut. House prices are clearly trending downwards, consumer spending slowed to 0.2 percent in Q4 of 2007 as GDP growth was confirmed as slowing to 0.6 percent. Consensus forecasts for growth in 2008 have fallen to 1.7 percent, and LIBOR has again moved out following the previous cut last month. Meanwhile, the US is showing clear signs of weakening and the Fed has been very aggressive in cutting rates.
“However, inflation, whilst still muted (latest figures showed a rise to 2.2 percent in January which was less than expected and 1 percent below the Euro zone), has got pressures in the pipeline.
“Utility bills have risen sharply on the back of increased fuel prices, global food prices continue to rise and the Chartered Institute of Purchasing and Supply showed manufacturing prices rising by the highest level since its survey began in 1999. The Bank of England’s own inflationary report even indicated that it expects to break the 3 percent CPI ceiling this year.
This expected move maintains the view that the economy will slow markedly this year before starting a recovery into 2009. The Bank clearly wants to try to control one side of the problem (inflation) even as the economy slows. Whilst this looks tricky, given much of the inflationary pressure is to do with global prices, and not UK specific issues, we are still not at a point where a serious period of stagflation is threatening.
This has implications for residential property said Neil Chegwidden, recently appointed Head of Residential Research at Jones Lang LaSalle.
“UK household finances are being squeezed from a number of angles and the fact that the Bank of England has decided to hold fire in lowering interest rates, for another month at least, will not be inspiring news.
“Households and house prices are now under pressure from a number of sides. The first contributor is higher inflation, especially in food and energy, which is serving to squeeze household’s discretionary spending. The other factors are mortgage related. Hundreds of thousands of homeowners are due to come off their fixed rate deals over the next 6-12 months and they will not only have to suffer a higher interest rate than previously but also pay a significantly inflated arrangement fee, and higher redemption charges, relative to two years ago should they chose a fixed or tracker product.
“Furthermore, these mortgagees are unlikely to benefit much from the recent 50 basis point cuts in the base rate as lenders have far from passed on the full benefit of these cuts to customers. Homeowners with less equity in their properties are also now likely to be charged a higher ‘risk-related’ interest rate than ‘safer’ borrowers”. The gap between base rates and LIBOR demonstrates the funding problems being faced by lenders and helps explain why the full impact of base rate falls are not being passed on to customers.
Despite these factors, Jones Lang LaSalle believe the UK housing market is actually holding up quite well and do not expect significantly greater house price falls over the next couple of months, but do expect the current trickle down in house prices, of circa 1 percent a month, to continue in the very short-term. In the medium to long term, the company predicts the outlook for UK house prices is very positive.
