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Market commentary

18 December 2008

However hard the government and the lending industry work towards improving conditions, 2009 is going to be a very tough year in the UK mortgage market. Although borrowers will continue to need a reasonable level of deposit to access the cheapest deals, lack of consumer confidence is likely to be as much of a constraint as the cost of borrowing and the availability of mortgage finance.

For existing borrowers who remain in employment, mortgages have got progressively cheaper for those on variable rate deals, which will be welcome news. But the economic recession means unemployment is rising sharply, and this will inevitably impact on the number of households facing mortgage arrears.

A challenging year ahead 

It is hard to imagine a more challenging environment in which to be making market forecasts. As the difficulties in the financial markets have begun to affect real economic activity, there have been seismic shifts in the macro-economic policies of governments and the perceived role of the state. Since mid-September, the tripartite authorities have acted decisively to limit the downside risks to the wider economy. But it was too late to avoid recession, and a recovery is not expected until the second half of next year at the earliest.

The housing market has borne the brunt of these difficulties and is going through a difficult adjustment process. The process is likely to be extended by a weak economic backdrop and the lack of available finance. We envisage housing market activity remaining extremely subdued, with around 700,000 housing transactions in 2009, down from around 900,000 this year and 1.6 million in 2007.

With the low level of housing market turnover, we anticipate gross mortgage lending of around £145 billion next year, down from around £258 billion this year, and £363 billion in 2007. Net lending, however, is likely to become negative as consumers repay existing mortgage debt to a greater extent than they borrow on new mortgages, perhaps to the tune of around minus £25 billion - a possibility already highlighted by Sir James Crosby in his analysis for the Government.

This likely decline in lending reflects a range of different factors, notably low consumer demand in the house purchase market, and the continuing constraints on funding available to support new lending, exacerbated by the regulatory and prudential need for lenders to hold more capital as the economy worsens and affects their businesses.

As the CML has pointed out, and the Chancellor acknowledged in his evidence to the Treasury Select Committee last week, the tensions affecting lenders in terms of balancing the interests of savers, existing borrowers, new borrowers, and prudent balance sheet management are significant.

There are a number of factors likely to lead to a large increase in mortgage arrears cases. The worsening economic backdrop will inevitably lead to a rise in the number of borrowers losing their jobs and facing disruption to their income. Lenders showing greater forebearance to reduce repossessions, including recent interventions such as the Homeowner Mortgage Support Scheme, will mean that more borrowers will remain in arrears. And the increase is inflated further by the arithmetic effect created by lower interest rates, as the same given amount of mortgage arrears represents a higher number of monthly payments when rates are lower.

By the end of 2008 the CML expects 210,000 households to be more than three months in arrears, and this number is expected to increase to 500,000 by the end of 2009. 

We anticipate the number of repossessions to be around 75,000 in 2009 - although a significant number of these are likely to be cases where the property is abandoned or where property fraud has been perpetrated, and a sizeable share are expected to be buy-to-let mortgages. Lenders are committed to ensuring that repossession is avoided wherever possible, where the household is committed to working with their lender to get back on track. Even though lenders will seek to minimise repossessions in 2009, the worsening economic backdrop does point towards an inevitable increase in the number of cases where a sustainable alternative solution cannot be found. 

But forecasting in the current environment is extremely challenging. So these figures represent a "best estimate" of direction of travel, rather than a precise analysis. They remain subject to a range of market and policy uncertainties.

CML market forecasts, December 2008

2005200620072008e2009f
       
Residential property transactions, UK, millions 1.6851.6270.90 0.70
      
Gross advances, £bn288346363 258       (285)145
Net lending, £bn91110108 40         (55)-25
      
Arrears, over 3 months at end period:
Number 122,900115,500129,600 210,000(170,000)500,000
% of all mortgages1.060.981.10

 1.80      (1.45)

4.41
       
Possessions in period:
Number14,60020,90026,200 45,000  (45,000)75,000
% of all mortgages0.130.180.22 0.38     (0.38)0.66
Source: Bank of England, National Statistics, HM Revenue & Customs, CML 
Notes:     1.  The HMRC series relates to residential transactions over £40k.  It is a new series which started in April 2005.   2.  Figures for arrears and possessions relate only to first charge mortgages held by lenders who are members of the CML.  They do not include arrears and possessions relating to other secured lending or to firms that are not CML members.     3.  May 2008 forecasts, where comparable, shown in brackets.

CML Research

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