Why we are sticking with our 45,000 repossessions forecast for now
Published: 14 February 2012 | Author: Bernard Clarke
As we reported last week, the total number of properties taken into possession by first-charge mortgage lenders in 2011 was 36,200. This was the lowest annual total since 2007. However, we have not amended our forecast for 2012, sticking with our December prediction of a total in the region of 45,000 repossessions over the course of this year.
This is quite a hike and it is perhaps worth recording our rationale if only to disabuse those sceptics who accuse us of over-forecasting higher numbers than we really expect (the implication being that we can then report a number "lower than expected" at the end of the year).
First, we should put these forecasts into context. We are always at pains to point out that they are primarily an indicator of the direction of travel in a difficult-to-predict market. They are not holy writ especially at this time when economic conditions are in such flux.
Still, they are based on our economic analysis which we set out below.
Our assumptions are derived primarily on our assessment of underlying conditions in the economy. But these underlying drivers do not always result in exactly what one might expect. So, over the last few years, the current very low interest rate environment does seem to have acted as an even more significant brake on repossessions than consideration of the economic situation as a whole might have anticipated. However, the CML’s current assessment is that a greater number of stretched households are likely to find it more difficult to cope this year, despite continuing forbearance policies by lenders, as upward pressure on arrears and repossessions will be exacerbated by the weakening employment market. Hence we predict an uptick in repossessions over the course of 2012.
The numbers in detail
For the fourth quarter of 2011, the number of repossessions was 8,500 - nearly 9% down from 9,300 in the third quarter, but 5% up from 8,100 in the fourth quarter of 2010. Repossessions in the third quarter were also slightly up on the same quarter a year earlier.
Chart One: Mortgages taken into possession, %
On arrears, there continued to be a modest improvement across all arrears bands in the fourth quarter of 2011 (apart from the 10%+ band where the apparent rise is due to a purely technical change in reporting), as well as in 2011 as a whole compared with the previous year. At the end of 2011, 159,400 mortgages had arrears equivalent to 2.5% or more of the mortgage balance, 7.5% down from 172,400 at the end of 2010.
Buy-to-let and owner-occupier sector differences
Buy-to-let properties accounted for 5,900 of the repossessions in 2011, up from 4,700 in 2010. The overall repossession rate was 0.32% in 2011 - 0.31% on owner-occupied properties, and 0.42% on buy-to-let. This compares with an overall rate of 0.33% in 2010 - 0.32% on owner-occupied properties, and 0.36% on buy-to-let.
The higher repossession rate on buy-to-let is not reflected in the arrears experience, however, with the buy-to-let sector experiencing a lower level of arrears than the owner-occupier sector. While the 3 months arrears rate stood at 1.98% of all mortgages at the end of 2011, the proportion was higher among owner-occupiers (2.06%) than among buy-to-let mortgage holders (1.38% if receiver of rent cases were excluded; 1.79% if included).
As we explained when we published the latest figures, the fact that buy-to-let mortgages experience a higher repossession rate, despite lower arrears rates, should not be surprising. This is because the efforts that lenders make to try to help home-owners keep their homes go above and beyond short-term financial considerations, and often extend well beyond a period that would be considered normal in other situations where the borrower is in default. This is an area where lenders quite clearly show a genuine commitment to their customers - and to the social good - for which they are rarely given credit.
In the private rented sector it is much more normal, on the other hand, for tenants to expect to move more frequently. Lenders honour the tenancy rights of those renting from bona fide buy-to-let landlords. Lenders also take significant steps to try to identify where there are tenants of less scrupulous landlords who have not disclosed to their mortgage lender that they are renting out what is meant to be their own home. But generally speaking, it is not usually necessary for lenders to wait for extremely long periods before they can obtain possession of a buy-to-let property, even taking full account of honouring tenancy commitments.
Chart Two: Mortgages more than three months in arrears, %
While the recent media coverage of our latest arrears and repossessions data may have included fewer doom-laden metaphors of ticking time-bombs, tsunamis and other scary images of future repossession rates, that does not mean that we can ignore the potential for problems within the economy, even though we do forecast that things may stabilise in the latter half of the year.
It is this concern which has led us to forecast the possible increase which has received so much attention in recent days. But let us keep all this in proportion. Even if those predicted levels did emerge, they would be on a par with 2008 and 2009 and far lower than the equivalent rates of the previous market downturn of the early 1990s and, while we are currently sticking with our 45,000 repossessions forecast, we won’t be making any apology if changing circumstances cause us to revise it down – nor if the actual number of repossessions falls short of the total that we expect in 2012. We are trying to make sense of a complex set of economic data at a time of economic turbulence, not crying wolf. And we all must take pleasure, not in hitting estimated forecasts but in keeping repossessions and arrears below historic peaks.