Published: 15 December 2010 | Author: Bernard Clarke
Today, we publish our predictions for mortgage and housing markets in 2011. Our forecasts are based on the prevailing consensus among economists that the UK will avoid a “double dip” recession, but that economic activity next year will be uneven. While we expect growth in UK output of a little over 2% next year, the risks are mainly on the downside.
With growth in output likely to be relatively modest and the rate of inflation expected to fall sharply at the beginning of 2012 as the effect of January’s increase in VAT to 20% falls out of the annual calculation, the Bank of England is expected to continue to pursue a relaxed monetary policy. It is unlikely that the base rate will rise significantly in the short term and it is quite possible that it will remain unchanged at its current level of 0.5% for the whole of next year.
The key messages behind our forecasts for 2011 are:
- The UK economy has begun a process of long-term re-balancing. Public sector spending cuts imply a difficult jobs market in the coming years. And with households also seeking to reduce levels of indebtedness, demand for mortgages may be subdued for some time.
- Over the short to medium term, lenders will need to manage some large-scale re-financing of wholesale funding. From April next year onwards, lenders will begin to have to re-pay the funding advanced through official support schemes. This is likely to limit the availability of credit to support mortgage lending next year, and beyond.
- Historically low interest rates are likely to underpin significantly current house price values, despite low levels of property sales.
- The continuing prospect of low interest rates, and flat or modestly falling house prices, reinforces the likelihood that remortgaging levels will remain low, even though growing numbers of borrowers are coming to the end of introductory deals and reverting to their lenders’ standard variable rate.
- Low interest rates will help the vast majority of households to manage to keep up with their loan repayments and so will help keep mortgage arrears and possessions in check.
- The outcome of the Financial Services Authority’s (FSA) ongoing mortgage market review continues to be a major and unhelpful source of uncertainty for the lending industry. Firms do not know when the FSA will issue firm rules or whether it will modify its current excessively risk-averse approach. This uncertainty will itself reinforce lenders’ caution.
Each house sold once every 20 years
The global financial crisis has had a pronounced impact on mortgage and housing markets. As a result, we have moved from a period with residential property transactions of over 1.6 million a year to one in which sales have fallen below 900,000.
Next year, we expect the number of transactions to total 860,000, that is very similar to the levels of the three previous years. The recent level of sales means that each property in the UK’s stock of 18 million privately owned homes is now only changing hands at a rate of once every 20 years.
Given the continuing economic uncertainties, there is little to encourage buyers. The £250,000 stamp duty exemption for first-time buyers is scheduled to come to an end in December next year, and this is likely to give a modest boost to sales as 2011 progresses and particularly as the deadline gets nearer. But the effect of this is more likely to bring forward transactions, rather than stimulate any significant new housing market activity.
Table One: CML forecasts
|2008||2009||2010 estimate||2011 forecast|
|Residential property transactions, UK, million||0.90||0.86||0.89||0.86|
|Gross advances, £bn||253||143||135||135|
|Net advances, £bn||40||12||9||6|
|Arrears, 2.5% or more of outstanding balance at end period:|
|% of all mortgages||1.57||1.72||1.54||1.58|
|Possessions in period:|
|% of all mortgages||0.34||0.42||0.32||0.35|
Remortgaging to remain subdued
Many of the things that influence market sentiment are unlikely to change to any significant extent next year, and we expect remortgaging to remain subdued. With interest rates staying at historically low levels, there is little incentive for buyers to rush to take advantage of existing fixed-rate deals. Borrowers currently on attractively priced standard variable rates also have little incentive to change. And many of those borrowers who would like to switch in order to pay a lower rate do not have enough equity in their property to meet the loan criteria.
First-time buyers will continue to find it difficult to get into the market. There is a crumb of consolation for them in that house prices are unlikely to rise significantly. While recent house price weakness may persist for some months, we do not foresee any sharp fall in prices, or large numbers of buyers holding off in the hope of getting a better price in the future.
Uncertainty about the availability and cost of mortgage funding will remain. The big issue for lenders next year will be to re-finance existing wholesale borrowing and begin to pay back the very large amounts of funding advanced through official support schemes. However, the prospects of them being able to do this without adversely affecting the market have improved. The amount due to be repaid under the special liquidity scheme by January 2012 has declined from about £180 billion to around £130 billion currently.
But despite a relatively favourable autumn for wholesale funding, the ability of lenders to continue to raise funds through securitisation and the issuing of bonds remains uncertain. Fortunately, the financial crisis in Ireland does not appear to have deterred investors in UK residential mortgage-backed securities, but further crises of confidence in the euro zone may do so.
Deposit-taking lenders are continuing to seek to reduce their dependence on wholesale funding by increasing their holdings of retail savings. As a result, competition for retail savings has become intense, pushing up their cost. Meanwhile, pressure on household budgets next year will reduce their capacity to save, ensuring that competition for the limited supply of retail savings will remain fierce.
With funding in short supply, the availability of mortgages for first-time buyers will remain limited. Lenders are likely to continue to have only a modest appetite for advancing mortgages at higher loan-to-value ratios. This is understandable in an uncertain operating environment, but it is now being reinforced by the higher capital requirements for low-deposit loans. As capital requirements are tightened through the new Basel III rules, lenders will continue to channel funding towards lower-risk customers, including those with larger deposits.
These trends are being further reinforced by the uncertainty surrounding the FSA’s mortgage market review. Existing proposals, if implemented, would exclude many potential borrowers from the market, restrict remortgaging options for many existing borrowers, and remove altogether some types of product from the market. Although the FSA says it is still consulting, uncertainty about the final rules will continue to reinforce the cautious approach being taken by lenders.
With modest economic growth, low interest rates, and private sector job creation offsetting public sector job losses, we do not foresee a significant change in the number of borrowers falling behind with their mortgages over the next 12 months.
However, the rate of improvement in mortgage arrears has declined sharply over the last six months. While lenders will continue to work with borrowers, debt advisers and the government to manage arrears, there will inevitably be some cases where it is not possible to recover the situation and where possession remains the only realistic option.
We predict a modest increase in arrears and possessions next year, reflecting the continuing pressure on household finances, the persistence of cases of long-term arrears and the government’s decision to cut help for borrowers by cutting payments of support for mortgage interest.
The economy – and housing and mortgage markets – have made significant progress since the financial crisis of two years ago and now appear to be on a more stable footing. But recovery has been patchy and weak. The supply of funds to the mortgage market remains much more limited than before the crisis, and households are much less confident about taking on large-scale borrowing commitments.
These factors, along with the regulatory constraints imposed by increased capital requirements and the possibility of rule changes being considered by the FSA, have influenced our forecasts for next year. Activity in housing and mortgage markets is set to remain broadly flat in 2011 and we do not envisage a return to the lending levels that characterised the middle of the last decade for many years to come.