House Prices Continue to Fall But Rates Ease
The slump in house prices droped in November with prices falling by just 0.4%, according to the Nationwide, the UK’s largest building society.
The mortgage lender said the rate of price falls “moderated significantly” when compared with October’s 1.3% fall.
House prices are down 13.9% from November 2007, easing from a 14.6% annual fall in October.
However, Nationwide warned that the weak economy would continue to put pressure on the housing market.
“In spite of the moderation in house price falls recorded in November, with the economy in recession, conditions do not appear very favourable for a swift recovery in the housing market,” Nationwide’s chief economist Fionnuala Earley said.
“With prices falling at their current rate, there is also less incentive for new borrowers to hurry into the market.”
The average price of a house now stands at £158,442, the Nationwide said.
This amounts to a drop of £25,000 in the past year, although the building society says prices are still £25,000 higher than they were in November 2003.
The past year has seen the UK property market endure one of its biggest and most sudden slowdowns in history.
It is estimated that the UK house building industry has shrunk by half since the start of the international credit crunch in the summer of last year.
Earlier this week the former head of the HBOS mortgage bank, Sir James Crosby, recommended that the government take direct action to stimulate the flow of mortgage funds to the UK banking industry.
He warned that otherwise new mortgage lending might dwindle to a complete standstill.
And that in turn would lead to a further downward spiral of sales and prices which would make the impending economic recession even worse.
In evidence to a Parliamentary committee, Mervyn King, the governor of the Bank of England, said no issue was more important at the moment than the restoration of general bank lending.
“The government’s massive fiscal boost may prevent the downturn in economic activity being as severe as would otherwise be the case but it will not prevent a sharp jump in unemployment over the coming year,” said Simon Rubinsohn of the Royal Institution of Chartered Surveyors (Rics).
“The real issue for the property market remains the collapse in transactions rather than the necessary adjustment in prices,” he added.
David Miles, chief UK economist at the investment bank Morgan Stanley, said there had been some good news in the past few weeks.
“We have had some very substantial cuts in interest rates from the Bank of England,” he said.
“That will feed through to lower costs of mortgages, for those who already have a mortgage anyway, pretty soon,” he added.
But the consultancy Capital Economics said the Nationwide’s figures were unlikely to herald an upturn.
“November’s moderate fall in house prices is not a sign that the housing market is bottoming,” it said.
“With the economy set for a deep recession and unemployment rising steeply, we expect the sharper downward trend in house prices of recent months to reassert itself,” it added.
The gloomy outlook was supported by the West Bromwich building society, the UK’s seventh largest.
Reporting a 65% fall in half-year profits to £8m, it forecast that house prices would fall further in 2009.
Fearing that some of its borrowers may start defaulting on their mortgages in increasing numbers, the society set aside a further £7.5m to cover potential bad debts, even though its arrears are currently lower than the industry average.
Bank Of England Dramatically Cut Interest Rates By One and A Half Percent
The Bank of England has cut interest rates in the UK by one-and-a-half percentage points to 3%, its lowest since 1955, in a shock move.
Last month it cut rates from 5% to 4.5% in an emergency move co-ordinated with other central banks.
There had been widespread calls from industry for a major cut as the country begins to face up to the prospect of a deep recession.
It is the largest cut since a two percentage point reduction back in 1981.
The cut comes after a lot of weak economic data recently.
This is the first time the Bank has cut rates by more than half a percentage point since gaining its independence in 1997.
After the announcement the FTSE stock market gained more than 100 points, to stand down 86 points, or 1.90%, at 4444.67 by 1245 in London.
The move has been broadly welcomed by business bodies and trade unions.
Richard Lambert, CBI director-general, said: “This is a bold and welcome move by the Monetary Policy Committee, and achieves what the CBI had been calling for.”
He added: “This cut should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers.”
The TUC’s head of economics Adam Lent said the move was “the right call”.
“It shows the Bank now understands that the problem is recession not inflation.”
Meanwhile, the Institute of Directors said interest rates could touch record lows of 2% or less by this time next year.
“The sooner we get interest rates down the less is the risk of a long and deep recession,” said IoD chief economist Graeme Leach.
There have been concerns that following a cut in the Bank of England’s base rate, it would not be passed on to borrowers.
Prime Minister Gordon Brown was asked about this problem in the House of Commons on Wednesday because Abbey had just raised its tracker mortgage rates for new customers.
“We want the banks and building societies to pass on the interest rate cuts to their mortgage holders,” he said.
“What we’ve been trying to do over the last few weeks is get the liquidity into the system, recapitalise our banks and then get them to resume the lending that is necessary.”
However Lloyds TSB has promised to pass on the rate cut in full to its variable rate mortgage customers.
The group, which also lends through Cheltenham & Gloucester says its standard variable rate, currently 6.5%, will never be more than 2% above Bank of England base rate.
The Bank of England’s interest rate move came after a series of figures released this week provided further evidence that the UK economy is sliding towards recession.
New figures from the Halifax showed house prices fell by another 2.2% in October, pushing the drop in house prices to 13.7% over the past year.
Activity in the service sector, the backbone of the UK economy, shrank in October for the sixth month in a row.
According to an index compiled by the Chartered Institute of Purchase and Supply output from services was at its lowest level since its poll began in 1996.
Also, the Office for National Statistics said that manufacturing output fell for a seventh month in September - the longest run of monthly declines since 1980.
Manufacturing output fell by 0.8% in September, much worse than analysts’ expectations, making output 2.3% lower than a year earlier, the sharpest decline since May 2003.
