The Bank of England (BoE) recently cut the base rate by 0.5% to 1.5%. Property experts welcomed the cut but the question remains as to how this will encourage banks to increase the availability of finance to either households or businesses.

Simon Rubinsohn, the Royal Institute of Chartered Surveyors’ (RICS) chief economist said: “ Indeed, the risk is that lenders are set to become even more restrictive over the coming months in the face of the worsening economic climate. With many first time-time buyers unable to find the finance to take an initial step onto the housing ladder and existing owner-occupiers needing to move similarly blighted, the time has come for the Government to take direct action to restore an orderly property market.”

The gap between new buyer enquiries and the number of mortgage approvals is increasing. New buyer enquiries, according to the latest RICS housing market survey, were at their best level since October 2006, whilst the BoE’s mortgage approvals data in the same month sank to its lowest point on record.

Rubinsohn believes that guarantees for the new issuance of residential mortgage-backed securities (RMBS) as recommended by Sir James Crosby needs to be adopted as soon as possible. By removing the risk associated with wholesale lending through securitisation vehicles, Government guarantees should inject some much-needed confidence back into the RMBS market. The RICS also think that incidences of negative equity and the level of home repossessions will increase if potential homebuyers continue to be frozen out of the market. RICS believes that a further period of sustained weakness in the housing market could deliver a further blow to consumer confidence and, in the process, lead to a deeper recession in the economy than might otherwise have been the case.

Michael Coogan, director general of the Council of Mortgage Lenders (CML), said: “This cut is a double-edged sword for retail-based lenders. While lower mortgage rates provide borrowers with the opportunity to repay their mortgage debt more quickly to reduce the term, lower savings rates impact lenders’ ability to attract deposits and maintain the flow of mortgage lending in 2009.
“The market is still not functioning property and is likely to lead to a fragmented approach by lenders, as they try to balance the interests of savers and borrowers and other pressures on their businesses, in responding to the announcement.”