AMI highlights challenges ahead

The report finds that the recovery from the recession is now underway but calls for the debate on public spending to be more honest and open about the challenges ahead. The report also highlights how the dominance of lending by the major banks continues to result in limited competition, which has kept deposits for mortgage products artificially high. AMI predicts that with the regulatory pressure on lenders to improve their capital positions it is likely that we will see £145 billion gross lending for 2009, and £150 to £170 billion for 2010.

Robert Sinclair, Director of AMI, said: "While the economy has strengthened since the bleak days of late 2008, the escalating levels of government debt are a major risk to longer term stability. Just a 1% increase in government funding costs will wipe out the benefits of either Labour's proposed asset sale or the Conservative's proposals to delay the payment of state pensions. The Government's programme of quantitative easing may have worked in the short term, but transitioning out of this to resolving our fiscal issues will be challenging.

"The housing market recovery seems to be holding, but it is unlikely that we will ever return to pre-recession levels of lending. The limited demand for re-mortgages has left sufficient funds for those who want or need to move home. However, first-time buyers are still limited by the size of deposits required. Lenders are now pricing new loans against the cost of retail funding not Base Rate or LIBOR."

AMI's report found:

• Despite the mortgage market recovering well, a slowdown in the pace of the upswing is likely
• LIBOR rates are now at lowest premium to base rates since early 2008
• Bank margins are increasingbut they are still lending cautiously due to regulatory change

Robert added: "The stability in prices we have seen in the last few months may have much to do with the limited supply of quality property coming on to the market. A serious concern now must be the number of people on base-rate linked default rates, who are effectively property prisoners for the foreseeable future, as moving would be economic suicide.

"More encouragingly, the trend line on arrears for this stage in the economic cycle looks positive. This is probably due to those on fixed and default rates still having affordable mortgages. As long as unemployment stays in predicted boundaries, this will continue to underpin the market."