What effect will the Bank of England’s drastic cut in interest rates have on the housing market? Last week’s reduction from 4.5% to 3% was bigger than anybody expected, and does not mark the end of the process. No wonder it has been greeted with enthusiasm by many in the market.

“While the news flow in the near term on both the economy and the housing market will be negative, this dramatic step should provide important support for confidence,” says Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors. “Those at the margins on variable-rate mortgages will breathe a sigh of relief as they find repayments more affordable.”

The cut should ease pressure on home-owners while giving new borrowers an incentive - if they can access funds, that is. Some estate agents were reporting increased interest from first-time buyers even before the bank’s move.

Two things, of course, have to happen before the bank’s action even stabilises the market. The first is that the rate cut is passed on in lower mortgage rates by the lenders. The second is that lower rates are combined with greater mortgage availability – the credit crunch has been about the supply of credit, not its price. The key to this is mortgage supply and the terms of that supply. Attractive interest rates may be of little use to first-time buyers if they have to find a 25% deposit.

Even if things loosen up, halting the decline will not be easy. The Halifax’s house-price index for October showed a 2.2% fall on the month and a record drop of 15% on a year earlier.

It is all a far cry from the last time interest rates were close to present levels, in 2003, when they were cut to 3.5%. Then, fuel was added to the flame of a booming housing market. House-price inflation was already running at nearly 18%. Over the next 12 months, prices rose by more than 20%. There is no danger of history repeating itself.

When house prices were booming, members of the Bank of England’s monetary policy committee insisted there was little they could do to stop it. Even much higher interest rates, they argued, would not restrain a gung-ho market. Now, all that is forgotten. Rate cuts will help – but they will not take us from bust back to boom.

home.economics@sunday-times.co.uk

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