Shock Cut as Bank of England cuts from 5.0% to 4.5%

London, 8th October 2008 - Outside of their normal sessions the Bank of England, the EBC and the Federal Reserve in the US moved to cut rates immediately by 50 basis points apiece. The coordinated moves are aimed at counterbalancing the vicious deterioration in financial markets and giving some measure of reassurance to households. This is the first half-point cut and first emergency reduction in the UK since 9/11. Paul Guest, Head of EMEA Research at Jones Lang LaSalle writes: “They could not have done anything else. The downturn will now be longer and deeper than previously expected, to the extent that the MPC believes it will be sharp enough to bring inflation back down to the 2% target in the medium term from its current elevated level.”

The inter-bank lending market has ground to a halt and the spread between the base rate and 3-month Libor, on which most mortgages are based, has increased significantly, reaching 135 basis points at the end of September. Restricted and more expensive mortgages saw lending continue to fall in August, with just 32,000 new loans approved according to the Bank of England. This is a record low, down 70% from a year ago and way down from the 130,000 peak in November 2006.

Some of the biggest lenders have raised mortgage rates amid turmoil in financial markets. Lloyds TSB has pushed up the cost of its two- and three-year fixed rate deals and Northern Rock has raised the cost of its entire range of residential fixed and tracker rate deals.

According to James Thomas, Head of Residential at Jones Lang LaSalle, “In the short term, this cut to base rates is little more than a sop to restore confidence. Libor rates will remain high as banks continue to work through the deleveraging process.”

James Thomas added, “The crisis that is rocking global financial markets means conditions for potential homebuyers will remain difficult. Potential buyers are reluctant to commit themselves to new mortgages, even when they are able to secure them. Rising unemployment and the financial crisis is creating uncertainty about job security, while at the same time house prices continue to fall.”

House prices were 12% lower in September compared to the same time last year and down 1.7% over the month according to Nationwide. The only sign of respite is that the monthly rate of fall has stabilized over the last three months, suggesting that the pace of decline is not accelerating at least.

James Thomas comments, “House price falls will present opportunities for potential homebuyers who anticipate the bottom of the market in order to take advantage of growth during the recovery stage of the cycle. The current market distress is shadowed by a chronic undersupply of housing provision in the medium to longer term.”

Commercial property

The global financial crisis continues to have an impact on the commercial property market and the outlook for occupier demand and rents has slipped further. Sentiment in the office sector is falling due to its reliance on financial and business services and the implication of significant job losses to come. At the same time the retail sector is suffering due to the downturn in consumer fortunes.

Fergus Hicks, Head of Forecasting and Economics said, “The downturn in the economy is seeing business demand for commercial space weaken and we expect commercial rents to decline both next year and in 2010. The economy is in the painful process of working off a credit bubble and this will take time, but generate opportunities when we emerge from it.”

The investor side of the market is also being hit hard by the financial crisis, with UK investment transactions down 58% in the first nine months of 2008 compared with the same period in 2007. The era of cheap, debt financed deals, which drove the market in 2006 and early 2007, is over due to the non-existence of debt financing as a result of the credit crisis. The deleveraging process and standoff between buyers and sellers that is taking place will see commercial property yields remain under pressure, with further upward moves anticipated.

Email: melissa@completemediagroup.co.uk