The housing and mortgage markets have never been easy to either read or forecast and this is particularly true at the moment.
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Depending on whether you read the Daily Mail or Daily Express the morning after both the Bank of England announced its latest mortgage lending statistics and the Nationwide announced its house price figures, you could either believe that the markets are booming, or showing the first signs of decline.
Looking at the statistics
The Bank of England’s figures, released on 31 May, showed that the number of new approvals fell to a 12-month low of 107,000 in April, down from 111,000 in March and the third monthly decline in a row. Mortgage lending did actually rise by £8.9 billion, but this was much less than expected and the weakest rise since September 2006. A further indication of a slowdown was the fact that consumer debt only rose by £498 million, which was half the expected increase and the smallest since March 1997.
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The consensus of opinion appears to be that these statistics are showing that the Bank’s interest rate medicine is starting to work. Four interest rate rises since August last year are starting to feed through and the housing and mortgage supertanker is starting to slow down. Many economists are anticipating a further rate increase, but the Monetary Policy Committee may hold off a couple of months to see just how the economy continues to respond to the interest rate medicine which it has already handed out.
However, before we all start to batten down the hatches and prepare for a housing and mortgage market meltdown, it is worth considering the Nationwide house price statistics which were published on exactly the same day. Although they also tend to indicate a modest slowing down, it is still a long way from being a meltdown. What the Nationwide’s statistics actually showed was that house prices continued to rise. The month on month increase was 0.5 per cent and the year on year increase was 10.3 per cent. When you bear in mind that the overwhelming majority of economists forecast house price growth in the 4-6 per cent range this year, the reality is that the market is still performing well ahead of expectation.
One big mistake?
So what’s happening? Is this another case of the forecasters getting it badly wrong or are there other factors we need to take into consideration?
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The truth is that the forecasters have got an impressive record of getting it badly wrong. Last year, for example, the Council of Mortgage Lenders forecast house price growth of 2 per cent, HBOS 3 per cent, Nationwide between 0-3 per cent, Hometrack 1 per cent, Rightmove and the Royal Institution of Chartered Surveyors 4 per cent and Capital Economics forecast a 2 per cent fall. The actual figure was 10 per cent growth – double the most optimistic forecast. So don’t be too tempted to pay too much attention to the so-called experts.
In fairness to the boffins, however, the numbers are difficult to call and the housing market is notorious for moving in a series of unpredictable lurches rather than making a smooth transition from one level to another.
One of the factors putting a spanner in the works this time around is the high number of borrowers with fixed rate mortgage deals. In March this year, 78 per cent of all new lending was on fixed rates. In July 2002, by comparison, the figure was just 18 per cent. Capital Economics believes that just 55 per cent of the outstanding stock of mortgages is now on variable rates, whereas in the 1980s this figure would have been at least 90 per cent.
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With another possible rate increase on the way, fixed rates have remained extremely popular. 80 per cent of fixed rate deals are relatively short-term two or three-year deals, with 15 per cent being fixed for five years and the remainder being for longer-term deals. The problem this creates is that a large percentage of borrowers haven’t yet felt the effect of interest rate rises on their monthly payments. What’s more, they won’t feel the effect of another rise either. This is causing a lag factor and the challenge for the Bank is not to push rates too high, as this could slam the brakes on the economy – not the result it wants.
I suspect that what will actually happen is that 2007 will turn out to be a year of two halves. In the first six months, house prices and the mortgage market have continued to race ahead at a fair old pace, but in the second half, increases in interest rates will start to take effect and the markets will start to slow.
Options
What does all this mean for brokers? In reality it probably means that the market is going to slow down but not go into decline and that we shouldn’t expect to see the sort of double digit growth rates which we have come to expect in the past. Although there is no need to start looking for alternative employment just yet, there is a need to consider ways in which you can boost income if the market does start to slow.
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The two obvious options are to try to increase the income generated per mortgage sale by selling services such as insurances, life cover, conveyancing and, in due course, Home Information Packs. The second option is to consider new markets in which you may not be very active, such as non-conforming, overseas mortgages or lifetime deals.
Although we all need to keep an eye on market developments, there is a danger in becoming overly influenced by the experts. They got it badly wrong last time around, and may well do the same in 2007.
