Upbeat CML stats can’t mask uncertainties about the future, argues Nick Hopkinson, director of Property Portfolio Rescue
On the face of it the latest arrears and repossession figures issued by the Council of Mortgage Lenders (CML) painted a cautiously positive picture. The second quarter 2010 statistics revealed a fall in repossessions over the first three months of the year from 9,800 to 9,400 the corresponding figure for the second quarter of 2009 had been 11,800. In terms of arrears there were 178,200 loans with arrears equivalent to 2.5% or more of their mortgage balance – a figure 5% lower than the previous quarter and 17% lower year-on-year.
Talk around these stats was of a ‘welcome decline’ and the CML has revised down its forecast for both arrears and repossessions in 2010. It now expects 175,000 loans to end the year in arrears of 2.5% or more instead of 205,000, and it is expecting a total of 39,000 repossessions instead of its previous forecast of 53,000.
The CML claim that repossessions and arrears have been managed pro-actively by responsible lenders and they are not as bad as previously feared and will fall further in the months to come. However, given what is happening in the wider economy and everyone else’s expectations for the true impact of swingeing public sector cuts from the Government, the latest retrospective CML figures are probably not a good indicator of the level of financial distress that homeowners are likely to suffer in the coming year or so.
Property Portfolio Rescue (PPR) deals daily with distressed sellers who come to us before their properties are repossessed, looking for a fast sale. This gives us a uniquely forward-looking insight into UK residential property market activity in which sellers are getting more distressed and many ‘selling chains’ are breaking as buyers lose their confidence and/ or lose their mortgage funding.
The PPR ‘Distress Index’, published quarterly, takes the number of enquiries we have received in the last three months and correlates it against official data to forecast future mortgage possessions, company liquidations and UK unemployment. We believe a 12% increase in distressed seller enquiries in quarter two this year makes it very unlikely there will any significant further falls in repossession/arrears in the next three quarters through to 2011.
There are a number of reasons distressed seller/repossession numbers will rise in the coming months. Firstly, the record low Bank Base Rate, which has remained at 0.5% for over a year now, has given many homeowners a lucky reprieve with their debt costs it is therefore very worrying that there are a ‘rump’ of borrowers who are not making any progress in reducing their arrears. These people are sitting on an interest rate ‘time bomb’ that is primed to blow up in the next year. Inflation continues to shock the Bank of England rate setters nearly every month on the upside even though everyone else could work out that the cost of living is increasing ahead of plan without a fancy forecasting model pretty easily. It can only be a matter of time before interest rates have to go up again towards a more ‘normal level’.
Despite the official inflation figures which remain fantastically low public sector workers are looking at an effective pay-cut of around 10% over the next two years as they suffer an austerity pay freeze and the cost of living increases grind away. Anyone filling up their car with petrol or buying groceries knows that real world inflation is running at 5%-plus at the moment which is going to cause further household financial distress for many.
Secondly, we have the ‘mortgage famine’ which currently exists and is arguably as bad as at any time since the Credit Crunch struck in 2008. The banks are desperately trying to repair their balance sheets and not looking to take lending risks latest official data on bank lending margins increasing significantly is clear evidence of this. Simply put, homebuyers need a perfect credit rating today and a huge deposit to get a mortgage expensive lending fees also need to be added on top too for all but the smallest loans. Stories of pessimistic surveyors down-valuing properties on an almost systematic basis, potentially to reduce lender risks further, are common-place amongst distressed sellers who have had chains collapse. In other words, even if buyers fit the tight criteria ‘on-paper’ there is no guarantee the mortgage loans needed to retain property price stability will be offered currently.
Therefore, while this set of statistics from the CML is relatively upbeat, they cannot disguise the fact that they are looking back whereas the major bumps in the road are visible ahead of us. Advisers will undoubtedly start to see a trickle of clients coming to them who fit into the following categories perhaps they are sellers who have lost buyers and are now having to drop prices, or they are struggling with debt and are looking for quick sales in order to access the equity they have in their properties now?
All the major house price indices are starting to show house price falls due to an increase in stock coupled with a loss of confidence from buyers. This state of affairs looks likely to continue at least in the near future and therefore it is understandable why some property owners are looking for quick sales. Again, this all feeds into the number of enquiries we receive rising as they look for cash buyers with plenty of experience advisers with clients in this position may well feel now is the time to take advantage of such expertise and the likelihood is that many more homeowners, landlords, developers and property owners will look to get their debts under control by making the most of their assets now before they fall in value.
