The Bank of England’s announcement has come as no surprise, but will only lead to more house builders not commencing new projects in the current climate. Persimmon is not the first and it will by no means be the last, to announce a freeze on new starts.
Despite pressure from sectors from within the property market, demanding further reductions, the Bank’s Monetary Policy Committee (MPC) decision to maintain the base rate at 5 per cent, was largely expected.
The Bank of England was in a difficult situation, to strike a balance between kick starting the UK economy and reigning in inflation. Inflation is currently 2.5 per cent, half a per cent ahead of target. Lingering pressures are continuing to restrain the MPC in its ability to lower base rates steadily and consistently, up to now.
Recent rate cuts in the main have not been reflected in headline lending rates, which is increasing fiscal pressure on homeowners and having a knock-on effect on the economy as a whole, with retail spending significantly down. This is now feeding directly into the housing market, as house builders and estate agents struggle to sell property. Bovis Homes Group, one of the UK’s largest house builders is presently reporting difficult trading conditions.
At the time of its preliminary results announcement for the year ended 31st December 2007, Bovis Homes Group commented that the short-term outlook for the housing market in 2008 remained uncertain, with a reduced availability of mortgage finance adversely impacting the market and further reducing consumer confidence.
This has contributed to a much reduced volume of mortgages being approved, such that the British bankers Association has reported a 46 per cent decline in the number of mortgage approvals for house purchase in March 2008, compared to 2007. Combined with ongoing adverse press speculation about the housing market, this is making homebuyers markedly more cautious.
The Bank’s injection of £50 billion into the mortgage market has yet to feed through the system, where the consumer benefits. Some analyst argue home purchasers will not smell nor taste any of the £50 billion, which was really given primarily for institutions to ‘shore up’ a financial crisis that was looming. On a positive note, economists are expecting some degree of normality to return to the market in early autumn and for at least another base rate reduction before the end of the year.
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