The Intermediary Mortgage Lenders Association (IMLA) certainly thinks so. It has said that in the face of such a volatile market, industry pundits are not exercising nearly enough caution in their predictions. According to IMLA, the market will remain flat, despite forecasts of up to 3 per cent growth.
It is true that over-optimism within the industry would seem rather odd considering the turmoil which has taken root in the financial markets. Instead all involved should be erring on the side of caution by default – especially now mass redundancies are becoming a daily occurrence.
The ripple effect of this market turbulence, combined with tightening lending criteria which has left people unable to finance a property move, has also led estate agencies across the country to report that sellers are putting the brakes and prospective buyers are subsequently taking time out to rethink any potential move.
If those instrumental in driving house prices - the buyers and the sellers - are exercising renewed caution, then it would make sense that commentators did the same.
Alan Lakey, partner at Highclere Financial Services agrees: “It is definitely a case of too much optimism. The housing market will probably dip in 2008 due to borrower sentiment. So many things are happening at the moment and a general air of disquiet is pervading the market.”
Keeping faith
The issue of confidence within the housing market, whether on the part of the broker or lender, buyer or seller, is key. While theorising that ‘what goes up must come down’ might be seen as pure pessimism after house prices rose by 23 per cent in the last three years, nine interest rate hikes over the same period have put untold pressure on the market – and knocked confidence in all areas.
Lakey continued: “A lot of people fail to understand that the housing market is totally based on confidence and a combination to a greater or lesser extent of interest rates falling, volatility petering out and a degree of stability returning to the market will be the only way house prices can begin to claw their way back up.”
These pressures will undoubtedly begin to hit home in 2008, especially if the Monetary Policy Committee (MPC) choose to hold off a rate cut until the New Year. While a November rate cut would be welcomed , most concede that it might be too soon for the naturally prudent MPC to take the plunge.
This takes on an extra degree of significance when looking at the way the vote was split in October with 8-1 in favour of freezing rates, the rebel vote opting for a reduction. From this position, the resulting swing over to a majority vote in favour of a rate cut could be one step too far.
Peter Williams, IMLA’s executive director, said: "Without doubt, there are some clouds on the near horizon. If the market correction gathers pace in the way suggested, 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.”
Elements of realism
But adopting the IMLA-sanctioned ‘realistic’ approach to the future is surely just heeding the warnings of falling house prices which have been bandied around over the past few weeks?
Richard Donnell, director of Hometrack, explained that while IMLA believes a forecast of 3 per cent growth in 2008 might be deemed excessive, year on year house price growth at 10 per cent means that a reduction of 7 per cent is an accurate response to current market conditions.
“Everyone would admit that mortgage affordability is stretched, but the debate is to whether we get a soft slow down, a slow down or an out and out house price fall.
“LTVs are low anyway which is a very different situation from back in the late 1980’s – what we are seeing now draws similarities to 2005.
“However interest rates peaked at 4.75 per cent back then and we now see rates of 5.75 per cent coupled with a number of important negative factors – there was no ‘credit crunch’ back then.”
Rather than debating whether forecasters are demonstrating enough realism when it comes to house price growth, Andy Pratt, chief operations officer at Alexander Hall, believes IMLA should look to query the effect that the slow down will have on lending volumes instead.
Pratt said: “People are pretty much agreed on house prices at an average of 1-2 per cent growth. The difficulty comes when predicting the level of gross new lending which will occur in the market – people got it a bit wrong this time last year, so naturally that should take more of the focus for 2008.”
The long and short of it is that these driving forces are inextricable from each other. While house price growth will have a significant impact upon lending volumes, the availability of financing and the affordability constraints borrowers now have to adjust to will be the catalyst behind many opting to stay put and ride out the current climate.
With job cuts and company closures still around every corner, maybe a good dose of considered optimism is just what the market needs.
