Credit crisis overrides rate cuts

Interest rate moves won’t make a big difference to the housing market outlook according to Savills Research. In their latest analysis of the UK housing market they say that it is not so much the cost of funding as the availability of funds that is governing the market. “The credit squeeze became a crunch and is now a crisis” says Yolande Barnes, Director of Savills Research. “It is the availability of finance rather than the costs of finance that is the issue. Base rate reductions have little impact in a situation where mortgages are being severely rationed. Lack of funds, high arrangement fees and high variable rates mean that the effective average mortgage rate is likely to remain little changed for the average borrower and some borrowers will face big hikes when fixed rates come to an end”.

The research team are still anticipating that credit will become increasingly available towards the end of 2008 and the prospect of prolonged recession is avoided, “Job losses under this scenario are limited primarily to the financial sector in London and, if this is the case, we stick to our current prediction of -4% falls in 2008 and -2% in 2009” comments Barnes “but the risks are increasingly on the downside”.

Signs that the withdrawal of credit is already affecting industry sectors outside of the finance industry can be seen in the housebuilding sector. “The value of development land has fallen dramatically in the first quarter of 2008” says Barnes. Savills index of urban residential development land fell by -8.6% between December and March and by -8% for Greenfield development land. ”Big falls were expected for urban land, but not so big for the Greenfield markets where the fundamentals are more sound. This is a sure sign that lack of finance is forcing builders to retire from bidding even in viable markets” says Barnes. The market for development land has now shrunk to only include those with equity or other forms of funding. There may be some bargains to be had but the main result will be that landowners simply won’t sell unless they have to – land deals will be very sparse this year.

This lack of turnover will be a feature of the mainstream UK residential market too. At present, most markets are broadly static and registering only small falls in the first quarter of 2008. The main casualty of the downturn has been, and will continue to be, turnover. The withdrawal of funding means that most deals simply will not take place. “We anticipate that turnover levels in 2008 will be between 25% and 30% lower than in 2007 in any event” Barnes concludes.