A realistic view of the market is needed, says IMLA

As the pundits gaze into their crystal balls and predict what’s set to happen in the UK’s housing and mortgage markets in 2008, IMLA takes a business perspective seeking to separate the wheat from the chaff.

This means a realistic take on how far the market has gone up in recent years and how much it might go down.

House prices

A number of commentators have now offered their predictions regarding the trend of house prices in 2008, with the most optimistic forecasting average price rises of 3% and more cautious observers saying they will be flat or may decline slightly.

IMLA’s Executive Director Peter Williams comments: “We can see that even the most upbeat commentator expects prices to rise by no more than 3% on average, broadly in line with inflation – so at best prices would be virtually flat in real terms. Other opinions suggest that we may see a fall in real property values, ie, that is taking inflation into account as well. The fact remains that house price inflation will, as always, be uneven across the country, so though we can expect properties in good locations still to increase in value (both actual and real terms) there may be localised falls. Indeed press reports suggests this has already happened even in favoured locations such as Winchester, though we must recognise this is on the back of exceptional increases over the past few years (over the three years since September 2004, house prices in England and Wales have risen on average by 23%). In reality only someone who has bought at the top of the market will be significantly impacted by this slow down.”

Credit quality

A significant pick-up in arrears and possessions is generally expected to emerge in the full year 2007 figures on the back of 14,000 possessions in H1 2007 (up 30% on H1 2006) – though encouragingly the third quarter court order data show only a modest increase. For 2008, the CML is forecasting a 16% increase in 3 month or more arrears (to 170,000) and possessions are predicted to rise by 50% in 2008 to 45,000 – albeit from a very low starting point.

Peter Williams says: “Although most lenders are experiencing a clear increase in arrears and possessions, it is from a very low base. Even with these forecast increases, only 1.42% of all loans would be 3 months or more in arrears, and 0.38% of loans in possession. Looking back at 1991 repossessions were running at over 75,000 in the year and almost 0.8% of mortgages. We are a long way from that, even in 2008.”

Business volumes

In terms of volumes, although mortgage lenders have seen a drop in business over the past 2 months and are preparing for the scenario that volumes will be depressed for at least the first half of 2008, the forecast volumes are still considerably higher than any years other than 2006 and 2007.

“Lenders are preparing for the likelihood that business will remain depressed throughout much of 2008, with less mortgaging activity and an increase in the proportion of remortgaging. The CML expects a 5.5% decline in mortgage volumes in 2008 relative to 2007 – which itself was a record year. Even a more pessimistic 10% decline would still see volumes considerably higher than in 2005 and 2004. We have to recognise where we have come from in market terms. We have been up at peak levels, so some easing is perhaps inevitable.”

Wider outlook

While the mortgage and housing markets could be impacted, positively or negatively, by a number of external factors that remain unclear, the fundamentals remain broadly positive, not least due to the imbalance between supply and demand for homes and the inadequate level of new build activity over many years.

“According to Nationwide, consumer confidence edged up slightly in September although GFK’s index fell marginally. Retail spending does not seem to have been dented to any significant extent, and the Bank is taking the view that there are significant upside pressures in the economy alongside the more negative evidence. While the Bank of England has increased interest rates five times so far, borrowing costs continue to be at historically fairly low levels and we have now moved from expectations of rate increases to rate falls, perhaps early in 2008.”

“The housing and mortgage markets are likely to remain flat in 2008, and some borrowers will be squeezed by payment shock as their mortgages are re-priced based on higher money market and swap rates. Without doubt, there are some clouds on the near horizon but IMLA’s view is that, if the market correction gathers pace in the way some pundits suggest, then we should expect firm action by the Bank of England to support the financial markets, provide liquidity and, if necessary, cut rates to protect confidence and help the markets recover over the medium term.”