Newsletter November 2007

Lending remains buoyant as affordability worsens, says CML

The total of gross lending in August was £34 billion, little changed from July’s £34.1 billion and £1 billion higher than in August last year. But the make up of lending has changed significantly since a year ago.

Both lending for house purchase and remortgage have declined by 11% and 12% respectively compared with August last year, but total lending has been buoyed by a strong buy-to-let market. Other lending was 37% higher than in August 2006, and has been consistently higher than its comparable 2006 figure throughout this year. This primarily covers buy-to-let which has continued to be underpinned by house price increases, tenant demand, rent increases and landlords’ willingness to take long-term investment decisions.                                                                                 

Compared with July, the number of loans for house purchase increased by 5% to 99,000, with a value of £15.7 billion, while the number of remortgages decreased by 5%, to 88,000, with a value of £10.5 billion. It is uncertain what impact the new home information pack requirements, which came into effect for newly marketed four bedroom properties in August 2007 and three bedroom properties from 10 September, had on activity levels.
 
Affordability has continued to worsen as first-time buyers typically borrowed 3.38 times their income, a figure unchanged since July, while the proportion of income they spent on interest rose from 19.7% in July, to 20%. Movers typically took out loans of 3.03 times their income and committed 17.2% of their income towards mortgage interest. Debt servicing burdens are the worst they have been in 16 years for first-time-buyers and the worst in 15 years for movers and set to worsen further in the next few months.

Fixed-rate products continue to be popular accounting for 78% of mortgages, up 19 percentage points from 59% in August last year. Fixed-rate mortgages provide certainty of payment levels over the early years of a mortgage, which may be helpful to borrowers when affordability is an obvious constraint. But with interest rates now potentially set to fall, tracker rate deals may become more popular as sentiment around interest rates changes.

Michael Coogan, CML Director General, commented:

“Affordability clearly remains challenging but there may be some relief for borrowers with expectations of an interest rate cut, perhaps as early as November.

“We are set to have a very segmented market for some months to come. The sub-prime sector is still facing funding constraints, while mainstream fixed-rate deals have begun to get cheaper.

“As lenders move to price for the risk they are taking on, mortgages are set to become more expensive for customers who have poorer credit histories. Now is the time for consumers to look to improve their credit status to keep their borrowing costs as low as possible. If you face payment difficulties, please speak to your lender before you miss a payment.”

RICS property auctions research, 2007.

The number of residential properties offered at auction rose by 32% in Q2 2007. The increase was pushed by repossessions, as affordability conditions deteriorated following interest rate hikes, says RICS research.

In the second quarter of 2007 there were 5 120 residential properties sold at auction, the highest number of sales in over two years and a 22% rise on the previous quarter. Rising interest rates in 2007 have increased the number of repossessions which have been showing up in the number of lots offered for auction.

Residential lots offered at auction should continue to pick up with the RICS estimating that repossessions could rise to in excess of 45 000 in 2008, amounting to 124 repossessions per day.

The highest concentration of auction activity took place in the North West of England, where 826 properties were sold.

The North West has seen the biggest quarterly pick up in repossession orders of any UK region and has also witnessed the largest number of repossession orders outside London six months prior, which may be now materialising into actual repossessions.

Merseyside previously saw a particularly acute rise in growth in repossession orders during Q4 2006 rising by 60% on the previous year.

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Slower - but steady - market in 2008, CML forecasts

House price inflation is likely to remain positive, property transactions are set to remain above one million, interest rates are set to fall by three-quarters of one per cent, and gross lending will decline but is still set to exceed 2005 levels, according to the 2008 housing market forecasts published by the Council of Mortgage Lenders.

The effect of the credit crunch has been to exacerbate trends that were already emerging in terms of a slowdown in the house purchase market.  With the effect of the interest rate rises since summer 2006, and the effect of the estimated 1.4 million households whose short-term fixed rate deals are due to expire in 2008, the CML was already expecting arrears and possessions to rise.  But this trend will be more pronounced than previously expected because of the funding constraints and tightening of lending criteria, resulting in reduced remortgaging opportunities across the lending spectrum but particularly for borrowers in the adverse credit (sub-prime) sector.

In summary, the CML is forecasting:

- House prices to rise 7% in 2007 as a whole, and 1% in 2008.
- Property sales to total 1.17 million in 2007 and 1.01 million in 2008
- Gross lending to reach £360 billion in 2007 and £340 billion in 2008
- Net lending to total £105 billion in 2007 and £90 billion in 2008
- The number of 3+ months arrears cases to reach 145,000 (1.22% of all mortgages) by the end of 2007 and 170,000 (1.42% of all   mortgages) by the end of 2008
- The number of repossessions to total 30,000 (0.25% of all mortgages) in 2007, and 45,000 (0.38% of all mortgages) in 2008
- Base rates to end the year at 5.5% in 2007 and 5.0% in 2008.

CML Director General Michael Coogan commented:

“The housing and mortgage markets are facing their most challenging period since Labour came to power a decade ago. Luckily, the credit crunch occurred at a time when the UK economy was robust, but even so the effects on the financial sector are significant, and the mortgage market is not immune from them.

“We now expect a slower mortgage market next year, although by no means a stagnant one.  Most borrowers will cope, but not everyone will escape unharmed from the effects of a slower market, so the government should make it a policy priority to overhaul the system of state support for home-owners, which has lagged pitifully behind the times."