A week on from the announcement of the drop in interest rates, commercial property lawyer Ryan David, of Dolmans law firm, Cardiff, comments on the potential affect on the property market:

“The recent reduction in interest rates by 1.5% is striking for anyone who follows the interest rates and macro-economic policy - we are used to the Bank of England tinkering with a 0.25% here and a 0.25% there and that these changes are done so gradually. So the Bank of England clearly thinks that the drastic circumstances call for drastic measures. But how does that affect the property market?

“It is very much dependent upon how the various lenders react to the reduction and how it affects the interest rate banks charge each other in the money wholesale markets. There is certainly political pressure on the banks to pass on the interest rate reduction both to customers and fellow banks to increase the disposable incomes of consumers and also increase the flow of liquidity between banks which, goes the theory, will increase residential and commercial mortgage backed lending.

“The problem with this analysis is that Banks are now more selective both to whom they are prepared to lend and in respect of what they are prepared to accept as security. Both commercial and residential property is being valued downwards by surveyors cautious about the potential for further decreases in property values with banks increasing loan to value ratios - effectively requiring bigger deposits - resulting in both businesses and individuals having far less scope to either raise money from property assets in order to invest in their businesses or buy houses. As a consequence, growth in the economy and property market in particular, based on rising values and banks willingness to lend on this assumption, has slowed such funding.

“Clearly the Bank of England sees the real problem as the overwhelming loss of confidence in the markets and their calculation is that by taking the initiative and bucking commentator and market expectations by such a dramatic step will inject some much needed confidence and cash into an extremely challenging property market and economy. Whether it will be sufficient to prevent the recession widely predicted by commentators to be around the corner remains to be seen.”

Email: lwindeatt@golleyslater.co.uk