Meanwhile, data that we have already published for part of this year confirms that lenders are also showing forbearance to borrowers who fall into arrears. Finally, a range of government schemes is also providing help. We have therefore lowered our prediction for the number of mortgage possessions this year from 75,000 to 65,000.
We have also said that our initial forecast for net mortgage lending of minus £25 billion in 2009 also now looks too negative. It is now more likely that total mortgage balances will be broadly stagnant this year. So, our new forecast is for net lending to fall by around £5 billion in 2009. This represents a significant improvement on the £25 billion contraction in the market that we had originally anticipated, and partly reflects the extensive fiscal, monetary and credit support measures that have been put in place.
Other forecasts
Despite these encouraging developments, we believe that it is too early to predict a robust recovery in the housing market. We will not publish forecasts for 2010 until later in the year, partly because there is still considerable uncertainty about a range of factors that will affect the underlying strength of mortgage and housing markets next year and beyond.
In the short term, the housing market is likely to be heavily influenced by unemployment – now rising strongly – as well as the number of hours worked by people who stay in their jobs, trends in earnings and the impact of negative equity on property transactions.
The outlook for mortgage and housing markets will also depend partly on the efforts households make to reduce their levels of mortgage debt.
Earlier this month, the Bank of England published updated housing equity withdrawal figures. An injection of £8.1 billion in the first quarter of this was widely interpreted as signalling an unprecedented effort on the part of households to pay down their debt. But the true picture is somewhat more complicated.
Mortgage repayments
The Bank of England publishes monthly data on mortgage repayments split between:
payments on redemption; that is, where payment clears the outstanding debt completely and discharges the mortgage;
regular repayments arising from capital-and-interest mortgages, where each monthly payment covers not only the interest on the loan but a slice of the principal, with payments of capital increasing as the mortgage matures; and
ad hoc lump sum payments that reduce but do not clear the outstanding balance.
Capital repayments are dominated by payments on redemption and these are closely linked to house sales and remortgaging activity. Typically, however, such transactions will be matched (or exceeded) by gross new lending to the borrower. As such, they are unlikely to tell us much about exposure to debt, despite the fact that both house sales and remortgaging have fallen sharply over the last year or so.
Leaving aside payments on redemption, however, Bank of England data shows that regular and lump sum capital repayments totalled £46 billion in 2008.
Sources of funding
Lump sum capital repayments have more than doubled in the last decade, and are important to lenders, given the recent sharp decline in retail deposits. In 2008, regular and lump sum repayments rivalled retail deposits as a potential source of funding for lenders, and they could feature even more prominently in 2009.
Interest rates
As one might expect, the regular repayments associated with capital-and-interest mortgages have risen significantly since the end of 2008 alongside the very sharp reduction in interest rates. The maximum cumulative increase in regular repayments appears to have been around £400 million a month.
Broadly speaking, this is perhaps a little above what might have been expected as a result of the automatic tendency of regular capital repayments on capital-and-interest mortgages to rise when interest rates fall. So, it is at least plausible – as we have heard from some members – that a number of borrowers have decided to maintain their mortgage payments at the level they were before interest rates began to fall sharply, thereby accelerating their capital repayments still further.
However, lump sum repayments have tailed off over the past year.
Borrower behaviour
Our rough calculations suggest that the household finances of variable rate borrowers have improved by around £20 billion a year as a result of the dramatic decrease in interest rates since the end of 2008. However, as much as £15 billion of this is not showing up in higher mortgage repayments.
Should we conclude that interest-only borrowers are making only minimal efforts to reduce their outstanding mortgage debt? Or is the repayment of debt by some borrowers being offset by the behaviour of others, like the self-employed who might be facing significant cash flow problems even though mortgage interest payments have fallen?
Another possibility is that the benefit of lower mortgage rates is feeding into more rapid repayment of other, more expensive forms of consumer borrowing. But if reduced mortgage payments are simply being used to maintain spending, how will borrowers be affected if – or, more realistically, when – interest rates begin to rise again? Will those borrowers be able – or willing – to cut back of their spending and increase their mortgage payments? Or will higher rates expose further mortgage payment problems?
Conclusion
The most likely scenario is that different groups of borrowers are experiencing most of the above simultaneously. And while some borrowers are doing as much as they can to accelerate their debt repayment, the Bank’s figures on housing equity withdrawal may be more significantly affected by the reduced range of borrowing opportunities and the more restrictive lending criteria associated with the borrowing that does take place.
