July 2008                                                                                                                                        [ConsPhone]

Another month, another challenge. We refer not to Gordon Brown and his now seemingly lost quest for some degree of resurrection in his popularity, but what to write in the words that follow. News continues to emanate from the market at break neck speed, so what to concentrate on first?

Let´s start with the news that the Bank of England´s Monetary Policy Committee (MPC) decided to leave rates on hold at 5% this month, a decision most of us were expecting. However, with the economic news from nearly all sectors of the economy as bleak as Dickens´ house, a rate cut is badly needed to help restore some confidence to consumers and reduce the financial pressure that is building daily.

Dear Darling. . .       There was some encouragement to be had in the recent letter from the Governor of the Bank of England, Mervyn King, to the Chancellor, Alistair Darling. It made clear that the MPC was prepared to take the medium to long term view on the impact the severe downturn in the economy will have on inflation and will not be panicked into increasing bank rate just because of the current spike in inflation, which it is powerless to stop. Granted, with the consumer price index now expected to hit 4% this year it is difficult for the MPC to cut interest rates, but the rapidly declining economic situation means a rise would cause more problems than it would solve.

The other point worth considering is that normally the government would be applying suitable pressure on the Bank to bring inflation in line but, with an election looming ever closer, raising rates is likely to be as much of a vote winner as disbanding a tax threshold . . .Seriously, we think it highly unlikely that the government will be clamouring for inflation to be brought into line at any cost.

To fix or not to fix, that is the question . . .
. . .to which the resounding answer should be no, not yet. Fixed rates recently hit an eight year high and still look much overpriced. At the time of writing, they do appear to be heading back in the right direction, but Charcol firmly believes that there is much better value to be had in the tracker market currently. At present tracker rates are around 0.5% better than their fixed counterparts and so unless bank rate averages more than 5.5% over the deal period, fixed rates will end up costing more. In fact, with bank rate likely to fall further the gap between current fixed rates and a tracker mortgage is likely to widen. Therefore, unless you need the absolute security of a fixed rate, a tracker is, in Much ado´s humble opinion, the right way to go.

What´s the latest news on house prices? There are several key considerations here when it comes to trying to predict the future of house prices. The first, and perhaps most important one, is consumer confidence and this is currently pretty low. What it will take to change this is some action on bank rate and with this expected to happen next year, and perhaps even beginning towards the end of this year, confidence will start to return. The other notable factor is supply and demand, something we still have a fundamental issue with in the UK. With new housing builds likely to be down to 100,000 both this year and next, against a recent of average of around 170,000, this will sustain house prices in the medium term. When Much ado consulted Ray Boulger, our resident  guru, he anticipated that, on average, house prices would fall 15% from their peak, but no further. We will spare you what he thought about those who are currently predicting falls of 50%; it would not make it through your email filters.

Should you wish to discuss any of the issues raised, then please contact your adviser [Consultant] on [ConsPhone] or [ConsEmail] to discuss. With access to the whole of market, they can recommend solutions that are entirely tailored to you.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP THE REPAYMENTS ON YOUR MORTGAGE