The Land Registry recently revealed that house-price inflation in the second quarter had slowed to its weakest pace for nine years, another indicator that the market had ground to a halt. House prices rose by 0.8 per cent in the second quarter, which brought the annual rate of inflation down to 5.4 per cent.

The Royal Institution of Chartered Surveyors (Rics) said buying activity was down by a third from last year's peak, while the Council of Mortgage Lenders said repossessions rose in the first half of the year for the first time in 10 years - up 45 per cent on the same time last year.

Halifax bank forecast prices would be 2 per cent lower at the end of this year compared to the end of last year, despite the interest rate cut. And economic forecaster CEBR said prices would not rise again until after 2010.

Rics said it welcomed the cut because it would support a fledgling recovery in buying activity detected recently. It believed that a second 0.25 per cent cut would be made over the coming months if consumer spending remained sluggish.

Liam Bailey, head of residential research at property consultancy Knight Frank, said the cut would encourage purchasers.

'The most important aspect of [the move] is that it sends out the correct signal to the market, that interest rates have peaked in the current cycle and there is likely to be at least another cut in the next few months,' he said.

He was bullish about future prospects. 'Our view is that prices will move sideways in the UK for the rest of this year, and in the short to medium term move back into their normal pattern of growth at or above the rate of average earnings growth.'

Specialist buy-to-let broker Landlord Mortgages said the reduction could start a rates war between mortgage lenders battling for new customers.

However, 'hundreds of thousands' of homeowners would pay higher mortgages despite the cut, mortgage broker Town and Country revealed.

Fixed-rate mortgages based on the 3.5 per cent base rates that prevailed two years ago will expire over the next several months. This means borrowers with these types of mortgages could find themselves suddenly paying variable rates that are nearly twice as high.

Robert Hadfield, managing director of investment property management company Pineflat said this undermined the positive effects of the cut on the market.

'My instinct is that investors should consider the reasons why the bank has cut rates: five successive monthly rises in unemployment, general retail sluggishness and perhaps an awareness that many borrowers are about to be hit with bigger mortgage repayments.'

The cut would make little difference to investors, Mr Hadfield said.

'If standard variable rates move down from 6.75 per cent to 6.5 per cent, the cost of borrowing GBP100,000 [$1.38 million] falls by about GBP20, from GBP562.50 to GBP541.66, which to me doesn't seem like a very persuasive argument for committing new money. I think that we will still be seeing lots of 'deposit paid' and 'guaranteed rent for two years' offers on new builds, and probably price reductions as well over the coming months.'

The interest rate cut is an extra confidence boost for east London estate agents celebrating the British capital's success in securing the 2012 Olympics.

The Rics believes construction of Olympian facilities in the Lower Lea Valley will encourage gentrification of the immediate area and further redevelopment of the East End.