Base rate held at 5%

UK homeowners and businesses will not be surprised by the Bank of England decision to keep the base rate at 5.00%. However, they will be universally disappointed.

Even though many households will not yet have felt the discomfort of a higher mortgage bill, everyone in the UK will have been stung by increased food, utilities and fuel costs and will not have been able to escape the burden of negativity surrounding the economy, the housing market and, undoubtedly of greatest concern to individuals, the possibility of losing their job. It is hardly surprising therefore that consumer confidence is now weaker and the hold stance on interest rates will not have delivered households with a much-needed fillip.

Housing market

Neil Chegwidden, Head of Residential Research at Jones Lang LaSalle is realistic about the prospects for the UK housing market “Today’s base rate decision will have minimal impact for the UK housing market. Despite all the gloom and the endless residential column inches, UK house prices have only declined by 0.5% a month in the first four months of 2008 – a drop of just 1.9% (according to the most reliable house price index, Nationwide). And whilst there are clear downside risks for the housing market, and most notably on transaction volumes, the fact that house prices have not fallen off a cliff during this period of intense negativity should tell us something about the resilience of house prices.”

Neil concludes, “The housing market is likely to continue its deterioration, a situation that will not have been helped by the base rate hold, but we question whether there are enough forces so far to suggest that the current 0.5% per month house price falls will accelerate significantly and be sufficiently prolonged to lead to 20-30% price falls touted by some. It is true that it takes time for a downturn to gather momentum, and that even an immediate recovery in credit markets will not be able to halt the slowdown in its tracks, but by the same token, with the housing market and house prices far from in meltdown, the house price trough and recovery curve could still be quite shallow. We expect UK mainstream house price falls of 7-9% this year with some quarterly price rises during 2009H2 and maintain our belief that prime central London markets will be a little more resilient. Most significantly, we believe it would take widespread job losses to send house prices significantly below these levels.”

Commercial property market

Occupational demand in the core Central London office market has begun to feel the pinch of a slowing economy, though regional markets have held up well. Commercial property capital values continued to fall during Q1 and although the pace of retreat slowed, we expect yields to continue to move out in the balance of the year. Paul Guest, Director of Research, UK at Jones Lang LaSalle writes, “The Bank’s decision to hold suggests that the recent easing in Libor could stall. Either way, credit markets will remain tight, with higher equity requirements and tighter lending criteria to endure into next year.”