While most people stick to the theory that 'what goes up, must come down', IMLA has highlighted that many 2008 forecasts are not taking into account the fact that house prices are currently balancing on a knife edge.
Optimistic reports are definitely not worth discarding, but IMLA are erring on the side of caution, explaining that an element of realism must be factored into any prediction - looking at how far the market has gone up in recent years and how much it might go down.
While Savills and Knight Frank are forecasting 3 per cent growth in the average UK house price during 2008, Hometrack are only looking at around 1 per cent growth - while Capital Economics are predicting the market will continue on its slump and depress by 3 per cent.
IMLA’s executive director, Peter Williams, commented: “We can see that even the most upbeat commentator expects prices to rise by no more than 3 per cent on average, broadly in line with inflation – so at best prices would be virtually flat in real terms.
"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 suggest 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 per cent). 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 per cent on H1 2006) – though encouragingly the third quarter court order data shows only a modest increase.
For 2008, the CML is forecasting a 16 per cent increase in 3 month or more arrears (to 170,000) and possessions are predicted to rise by 50 per cent in 2008 to 45,000 – albeit from a very low starting point.
Williams continued:: “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 per cent of all loans would be 3 months or more in arrears, and 0.38 per cent of loans in possession. Looking back at 1991 repossessions were running at over 75,000 in the year and almost 0.8 per cent 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.
The CML expects a 5.5 per cent decline in mortgage volumes in 2008 relative to 2007 – which itself was a record year. Even a more pessimistic 10 per cent decline would still see volumes considerably higher than in 2005 and 2004.
Williams concluded: “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.”
