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Fall in Halifax Index Preempts Cut In Interest Rates
Whichever way you turn, the news is not good. Yesterday, the Halifax announced its house price index figures showing the largest drop in house prices (-2.5%), over a one month period since 1992. With the Bank of England's announcement on interest rates due on Thursday 10th April, the indications are that a cut in rates is now inevitable. Whether the cut will be large enough to be a stimulus to the housing market is debatable.
Markets are forecasting just a 0.25% cut which may be swallowed up by the banks and mortgage lenders in an attempt to recover some of the margins they have lost over recent months due to the inter-bank credit crunch.
This comes on the back of a week of indicators including figures showing that mortgage deals available from the banks and home loan lenders have reduced by 20%. Even so, there are still nearly 4000 deals on the market although fixed rates and discounted rates are hard to come by. It is just harder these days to wade through the available deals to find one that has the most suitable underwriting terms to meet an individuals needs.
The Euro has also hit an all time high against sterling and the dollar. This has helped dampen the holiday property markets in Europe which were once primarily funded by British purchasers. The knock on effect on holidays could also see additional negative impacts on economies such as Spain.
The major concern as we look forward must be reflected in the continuing slowing of the US economy. If a Crystal ball was required, we need only look west to see what may lay ahead. Even with the Federal Reserve having 'slashed' interest rates three times in quick succession and a stimulus package that will see most tax paying Americans shortly receiving a $600 - $800 cheque from the IRS in the next few weeks, overall sentiment in the economy is firmly on a downward path.
Gas, (petrol) prices are at nearly $4 a gallon, an all time high due mainly to the weakness in the dollar. The cause of the weakness being the interest rate cuts that the Federal Reserve made in an attempt to stimulate the housing sector. The 'Catch 22' scenario seems set to drive the economy into recession unless the ECB and Bank of England join forces in an attempt to strengthen the dollar by cutting their interest base rates.
This would not be a bilateral move of generosity on the part of the Anglo-Euro central Banks. Far from it. It is a given that if the US falls into recession that Europe will follow. The fact that the central banks across Europe act independently of government should mean that it would be easier to make such decisions. However, the Euro-zone is a relatively new animal and finds itself in possession of conflicting indicators from disparate parts of the kingdom. This makes decisive action harder to make, leading to delays that may leave more damage than they would have under the old European currencies regime.
With the latest figures from the Halifax and an interest rate cut imminent, the beneficiaries of the lower rates may end up being those who decide to refinance their home loan instead of moving house. The HSBC announced today, (April 9th 2008), that it is willing to offer refinance deals for people with expiring fixed rate mortgages. This may be the start of a rebirth in lending with those banks not unduly affected by US sub-prime losses getting ready to pick up the slack from the mortgage hunting public looking to avoid higher payments in the months ahead.
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