Breathing space for the lenders

Housing market welcomes Chancellor's refusal to bow to pressure from Bank but wonders how long it can last

THE Chancellor's decision to defy the pressure from the currency and bond markets and from the Governor of the Bank of England for a rise in base rates is good news for the housing market. Borrowers had been bracing themselves for a further rise in mortgage rates next month, which could have taken standard variable-rate mortgages up to at least 8.75 per cent and added £15 a month to the cost of a typical £50,000 mortgage.

Lenders last raised rates in February, only to see the Bank of England raise base rates a further half point to 6.75 per cent a few days later. A further rise in mortgage rates and savings rates would have been inevitable if base rates had gone up again, even though demand for mortgages is relatively weak.

The effect on the housing market and consumer confidence would inevitably be severe. House prices across the board are still static, although there are signs of a weak recovery in London and south-east England, where prices were most depressed in the recession. The housebuilders would also have been hard hit. Completions were higher in the first quarter compared with a year ago, but applications for new starts were well down.

Any further rise in mortgage rates would come hard on the heels of the rise in mortgage rates in February - and the reduction in tax relief on mortgages last month - and further depress demand for mortgages while lenders are competing hard for remortgages to bulk out what little new business there is.

Savers could expect some increase in rates, which are currently unattractive, but an extra half per cent would certainly make life more difficult for other investments, including unit trusts, investment trusts and guaranteed income bonds.

The Chancellor has taken a calculated risk in not raising rates in the immediate aftermath of the local elections. An immediate rise in rates might have looked like a politically cynical decision - to delay the rise in advance of the election to minimise the political backlash and then to kick the electorate in the teeth at a time when the voters are clearly looking to the Government for a better deal.

The pressure for a rise in rates has always come from the financial markets, worried over the possibility of rising inflation. There were also fears that the Chancellor might raise rates now in order to justify tax cuts later.

The markets, however, remain divided over whether the Chancellor can or will continue to hold interest rates down. Delaying the inevitable would do the housing market little good in the long run, and home owners and the housing market will hope that pressure for higher interest rates will continue to recede.