Four reasons to be pessimistic about house prices

by Christina Jordan on 25 June 2009  |  19 comments
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Just when you thought things were looking up in the housing market, four different reports this week suggest otherwise.

Another week, another array of conflicting signs in the housing market, leaving us none the wiser as to whether the recovery has really begun or if we will bump along the bottom for some time yet.

The latest piece of positive news is from trade body The Council of Mortgage Lenders, which has revised its prediction for arrears and repossessions in 2009, saying that there will now be fewer that it had originally forecast.

While it admits that conditions in the housing and mortgage markets remain extremely challenging, the CML says that existing borrowers are gaining 'significant benefits' from the effect of lower interest rates.

This factor, combined with increased leniency from lenders (with their arms firmly twisted by the Government) has led the trade body to reduce its forecast for repossessions this year substantially from 75,000 to 65,000. It now also expects a 15% drop from its previous arrears prediction, forecasting around 360,000 mortgages to be in arrears by the end of the year.

In a statement about the revised figures, the CML said that cuts in interest rates have made it easier for households who suffer a loss of income to continue to pay their bills. It still thinks both arrears and repossessions will increase significantly compared to last year -- just not to the extent it previously predicted.

But this week, there were also four reasons to be pessimistic about the future of the housing market:

1) Repossessions are up

In contrast, the Financial Services Authority (FSA) released figures on the same day that paint a far gloomier picture -- they show repossessions up 62% in the last year, with a 33% rise in arrears, and say both have been rising steadily since 2007.

It also noted weaknesses in the way that some specialist mortgage lenders are managing their existing customers in arrears. This is particularly worrying since it follows two warnings by the regulator last year that it is unacceptable for lenders to fail to treat customers in arrears fairly.

Plus, arguably, the CML's new-found optimism is premature in the light of rising unemployment and the fragile nature of the economy.

While arrears may not currently be translating immediately into repossessions, in some cases, any measures being taken by lenders to help borrowers struggling with mortgage repayments will only delay the inevitable.

Plus, those who can't make their mortgage repayments now will only find themselves in a worse situation next year if and when interest rates go up and they have even less equity in their homes.

In other words, there could be worse to come.

Property Portfolio Rescue, a 'property recovery specialist, for example, predicts that repossessions will continue to rise for the remainder of 2009, exceeding 70,000 by the end of 2009.

2) Some borrowers are living in fear

Housing charity Shelter agrees that there are more problems in store, and has this week warned the Government and lenders against complacency when it comes to arrears and repossessions.

Chief executive Sam Younger said that with arrears escalating at an alarming rate, unemployment at its worst for 12 years and interest rates very likely to rise next year, he believes a second, more devastating wave of repossessions could occur within the next two years.

The charity has seen a 250% increase in the number of calls to its free helpline regarding mortgage arrears over the last year, and an 85% increase in the number of calls on repossession problems. Many callers say they fear for their future and are worried they will no longer be able to keep a roof over their heads.

3) There's a negative equity timebomb

More doom and gloom this week came from credit rating agency Fitch, which said that a third of borrowers could be in negative equity by next year if house prices drop as it expects.

It found that 10% of borrowers with an excellent credit record are currently trapped in negative equity, owing more on their mortgage than the value of their homes.

And it predicted that negative equity could rise to a third of all UK mortgages if its forecast of a peak-to-trough decline in house prices of 30% to 35% is correct.

Fitch found the highest concentration of negative equity in Northampton, followed by Nottingham, Derby and Peterborough. Rescued lenders Northern Rock and Bradford & Bingley were unsurprisingly those with the highest number of borrowers in this position.

4) Mortgage lending is down

Finally, the Council of Mortgage Lenders' statistics for May reported gross mortgage lending of £10.3bn -- a 2% decline from April and down 58% from May 2008. And if the mortgage lenders aren't lending, then the mortgage borrowers aren't borrowing.

I hate to sound like a harbinger of doom, but... it's not the most convincing housing market recovery is it?

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