However, it is still doubtful how much impact today's base rate cut will have on the UK residential market. This is partly because it is uncertain how much of the base rate change will be passed on to existing mortgage holders or onto potential home buyers. But more importantly it is because the current UK housing market is so weighed down by other influences that even this fundamental change in home financing conditions is unlikely to penetrate the current gloom.
Neil Chegwidden, Head of Residential Research at Jones Lang LaSalle comments, "Even despite today's dramatic base rate cut, we believe it will not help the UK housing market in the very short-term. The fact is that the incredible escalation of financial events over the past couple of months has significantly heightened the likely depth and duration of a UK recession and has also weakened the economic outlooks of almost all other nations. So now, because of the latest round of financial crises and bail-outs, and in spite of the base rate cut, house price falls are likely to escalate again rather than ease and turnover is set to slow further. Unfortunately for the UK housing market, and despite the significant base rate cut, the usual fillip provided by an interest rate cut will not be evident this time around. Indeed the change is likely to create greater worry for households, initially at least, rather than provide a boost."
UK commercial property
The 1.5% cut in interest rates made by the Bank of England today reflects the fact that all data on the economy in October was negative and the outlook has deteriorated significantly. The UK is entering recession and the downturn will continue to feed through to business demand for commercial premises in 2009. Falling demand, tough trading conditions and scarce credit all mean that occupier demand will weaken further and commercial property rents will fall across all sectors next year as a result.
The large cut in interest rates should help ease financing conditions. However, to date credit has remained severely restricted and expensive. Transactional activity in the UK investor market in the first nine months of 2008 was around 60% lower compared with the same period a year earlier. Investors remain very cautious, yields continue to edge higher and we expect yields will remain under upward pressure in 2009.
Fergus Hicks, Head of Forecasting & Economics at Jones Lang LaSalle comments, "The size of the interest rate cut demonstrates the magnitude of the downturn in the economy and the Bank's concerns. To date the biggest impact of the financial crisis has been on the investor side of the market which has seen a sharp drop in investment volumes and yields moving higher. The crisis is now feeding through to the real economy and GDP will be below year-ago levels through much of next year. This will see occupier demand for all varieties of premises fall and thus we expect commercial property rents will decline in both 2009 and 2010."
