The mortgage market has hit the headlines in recent weeks for the reason every mortgage lender dreads: rising arrears.
A survey of 2000 mortgage holders undertaken by NOP for Citizens Advice, showed that 4 per cent of all those surveyed had missed a mortgage payment in the past year. Scaled up nationally, that equates to 770,000 households. Of even greater concern, the survey identified first-time buyers as a particularly vulnerable group, with 13 per cent of those under 24 years-old confirming they had missed a payment in the past year.
These statistics will not come as a surprise to those working in the mortgage industry. When the Council of Mortgage Lenders (CML) revised its market forecasts in June this year, it increased its estimates for arrears for 2006, from 120,000 accounts over three months in arrears, to 130,000 by the end of 2007. Possessions are also forecast to rise: up from 10,000 last year, to a forecast 15,000 next year, 11,000 in 2006 and 12,000 next year. At the time of writing this article, the CML confirmed that more than 35,320 mortgages were in arrears in June this year, the highest level since 2001 and that repossessions have also risen to 8,140 in the past six months, again the highest level since 2001.
Fuelling the trend
So what is fuelling this trend? As always, it’s a combination of factors. Mortgage borrowing has hit an all-time high in the UK and has now passed the £1 trillion mark. By itself, this figure is not a cause for concern, but when combined with growing levels of unsecured and credit card debts, a picture emerges of UK consumers carrying far higher levels of personal debt than they have ever done before. Low interest rates and more easily available credit have combined to encourage greater indebtedness and the worry is that with interest rates possibly due to rise again, more people will encounter financial difficulties.
Citizens Advice says that for under 24 year-olds, student loans and credit card debts are a particular problem. The CML has also confirmed that first-time buyers are committing more of their disposable income on mortgages than they have done before. In July this year, the average income multiple for first-time buyers was 3.24 times their income, up from 3.06 times in the same month last year.
Some commentators are also saying that increased activity in the non-conforming market is contributing towards a rise in arrears and possessions and that this could become a greater problem in the future, as more lenders focus on this sector of the market.
Arrears statistics make shocking headlines, but they do need to be kept in perspective. Although 35,320 mortgages were in arrears in June, it has to be remembered that this is out of more than 11.5 million outstanding mortgages in the UK. At the West Brom, for example, only 1.18 per cent of all those borrowers who completed a mortgage in the past year have missed one payment; 2.94 per cent were first-time buyers.
Soft landing or crash landing?
There is no doubt that the market has slowed and that arrears and possessions are on the increase, but the prognosis from the economists seems to be that this is the much talked about ‘soft landing’ and not signs of an imminent market crash.
As far as the housing market is concerned, the latest Halifax House Price Index shows that house prices rose by 1 per cent in August and that the overall increase in house prices over the three months from May to August was only 0.2 per cent, compared to a 2.9 per cent rise in the preceding three months. This means the annual rate of house price inflation has eased form 9.4 per cent in June to 8.2 per cent in August and the Halifax is expecting this pattern of slowdown to continue over the coming months. According to the Halifax, the average house price in the UK is now £179,043. At the moment, it looks as if the Halifax House Price Index will end the year somewhere between 5 and 6 per cent.
This figure is still more optimistic than the CML, which is forecasting house price growth of only 2 per cent during 2006 and 2007. However, don’t get too excited about a difference of only 3 per cent; bear in mind that house price growth has fallen from a high of 26 per cent in 2002. The general trend is of far greater significance than the absolute figures and, as you can see, the forecast appears to be for a gentle slowing of house price growth over the next couple of years. There is also a danger that these trends are misinterpreted as meaning that house prices will fall. This is not the case. The rate of growth is slowing, but house prices never the less continue to grow.
Never a precise science
Could the economists have got it wrong and could the housing market race ahead in the coming months? Forecasting the housing market is never a precise science, but there seems to be broad agreement that the effect of the August rate rise has not yet fully filtered through and there is a growing expectation that another rate rise could happen before Christmas – probably in November. There has also been a softening in consumer confidence and, with levels of affordability continuing to be stretched, the consensus seems to be that house price growth will continue to slow in the final months of the year.
The UK inflation figures published in August show that, at 2.5 per cent, inflation has now topped the government’s target of 2 per cent for 4 months in a row. It is this headline inflation figure which may encourage the Bank of England to push interest rates up once again before the year is out. Last month, Mervyn King, the governor of the Bank of England, warned there was a 50-50 chance that inflation would rise above 3 per cent in the next six months and a good chance it would rise above 3 per cent over the next two years. The main weapon in the war against inflation is interest rates, hence an expectation of an increase.
Some people argue that the UK housing market is now over-priced and that a period of slowdown will allow affordability levels to catch up, which has to be good for buyers, particularly first-timers. There is a concern that, as the housing market slows, lenders will find new ways to lend more money (such as the use of affordability calculations) which simply fuels house price inflation once again. Whether this is true or not is debatable, but a period of slowdown will certainly help ease the affordability problem.
Growing demand
The UK housing market is one where demand for homes continues to grow, with the government pursuing a long term goal of extending owner-occupation to 75 per cent of the population (in 1984 it was less than 60 per cent). What’s more, over the next 20 years, the number of households in England is expected to increase by 200,000 annually. These increases mean that we need to build at least 200,000 more homes each year, simply to keep up with demand. It is this demand and not simply cheaper interest rates which will continue to drive the housing market forward. In simple terms, we have an awful lot of people living on a small island wanting a home of their own. Property is therefore going to be popular for a long time to come.
The housing market, like most others, displays marked regional variations. The Royal Institution of Chartered Surveyors (RICS) has reported this month that house prices remain strong in London and the South East. Prices in the North and East Anglia have also continued to rise, with more moderate rises being recorded in the South West, Yorkshire and Wales. It also reports that while confidence among surveyors remains generally high, there has been a significant fall in confidence among surveyors in London.
What do these trends mean for mortgage advisers? The good news is that the market remains robust. We may be experiencing a slowdown, but there is still plenty of demand for mortgages and a slump in the market seems highly unlikely. There are, of course, regional variations, but the issue is with variations to the rates of growth, rather than growth in some areas and declines in others.
Brokers have reason to remain confident for the future. We may no longer be living in an era of double-digit house price inflation, but the market remains in good health.
