Commentary: Hold is good news for housing market

By Melanie Bien, director of independent mortgage broker Savills Private Finance

(Bien is a guest commentator for reuters.co.uk. The views expressed in this commentary are her own.)

LONDON (reuters.co.uk) - The Bank of England's decision to hold rates at five percent this month comes as no real surprise although there was an outside chance that there might be an increase.

Despite seven of the Bank's nine-strong Monetary Policy Committee (MPC) voting for a hold in July (with one voting for a rise and one for a reduction), significant hikes in energy prices over the past couple of weeks are likely to fuel inflationary pressures. With inflation already running at 3.8 per cent against a government target of 2 percent there was always a possibility that the MPC would raise rates in order to rein back inflation.

A ‘hold' is good news for the housing market, which is experiencing extremely weak conditions. With the number of transactions falling dramatically, some in the industry have called for a reduction in rates to help boost the sector but this was always unlikely given inflation.

Swap rates - the money market rates determining future mortgage pricing - have already fallen in anticipation of a hold in interest rates. This has enabled several lenders - Abbey, Halifax, Lloyds TSB and Nationwide - to reduce some fixed and tracker rates several times in the past few weeks. While the pain of the credit crunch is not yet over, rate reductions on new deals are great news for those remortgaging or considering buying. Part of the reason for the fall in number of transactions is the inability to obtain mortgage finance.

But while rates are easing, criteria are not. The best mortgage rates are still available to those able to put down at least a 25 per cent deposit or who have this level of equity in their homes. First-time buyers without financial assistance from their parents will continue to struggle to get on the housing ladder. While there are glimmers of hope in the mortgage market, the housing market remains in the doldrums.

There is more pain to come here: Savills Research predicts a 10 percent fall in prices in 2008, followed by a 15 percent fall next year. Put into perspective, this will take prices back to 2004 levels. Only when potential buyers believe the bottom of the market has been reached will they purchase - unless they have to move before then.

But when recovery comes we expect it to be rapid because of lack of supply and pent-up demand. With house builders putting schemes in mothballs for the foreseeable future, once the market recovers there will not be enough property to satisfy demand from those who have delayed buying for 18 months. This could well lead to a significant spike in prices.