Archive news can be found at the bottom of the page

Forecasting is an inexact science at the best of times, and 2007 – which had more than its share of unexpected developments – was certainly no exception. No-one predicted the events of the late summer, which saw the closure of wholesale funding markets and the first run on a UK bank in well over a century.

At the start of last year, most commentators were looking for a modest slowdown in mortgage and housing market activity. But activity continued to run ahead of forecasters’ expectations beyond the middle of the year. It was just starting to show signs of a modest slowdown in response to raised interest rates when financial markets were disrupted in a way that had not been seen before.

A number of lenders faced funding pressures, the run on Northern Rock was front page news, and the market slowed markedly in response to the changed conditions. The stronger than expected start – and weaker than predicted end – to the year meant that most forecasts actually proved reasonably accurate for the year as a whole.

What the forecasters said

Annual house price growth was over 10% until the end of summer, and looked on course to exceed the projections of all analysts for the year. However, following modest falls at the end of the year, it came in at around 6% - in line with the consensual view. Perennial housing market bears Capital Economics (CE) were at the lowest end of the forecast range, predicting growth of 3.5%, while the CML and HBOS also marginally underestimated price growth. However, none of the forecasters were far away from the outcome, with Savills and Royal Institution of Chartered Surveyors (RICS) at the top end, predicting 7% growth.

Housing market turnover was also broadly in line with expectations. While data for the fourth quarter is not yet available, CML's best estimate is that there were 1.17 million property transactions in England and Wales in 2007. This is right between CML's forecast of 1.19 million and HBOS’ prediction of 1.15 million. In line with their generally more pessimistic outlook, CE had expected 1.13 million transactions.

With house prices growing strongly, particularly in the first half of the year, and remortgaging up from a year ago, lending volumes rose to £362 billion. This was in line with CML's own expectations and a little stronger than HBOS had anticipated. One area in which none of the forecasters fared particularly well was in predicting the course of interest rates. In underestimating the strength of the economy and inflationary pressures – and to some extent the housing market – in the early part of the year, all the commentators thought that Bank rate would end the year below the eventual outcome of 5.5%. In line with a range of other forecasters, most of those focusing on mortgage and housing markets anticipated a very modest increase in rates over 2007 from 5.0% at the start of the year. Only HBOS correctly predicted the most recent change of direction – anticipating a cut in rates late in the year.

The year ahead

Turning to 2008, the general consensus is that it will be a quiet year for housing and mortgage markets, as the fall-out from the credit crunch and reaction to last year’s rate movements feeds through. There is unanimity that interest rates will end the year lower than their current level, with most forecasts within a narrow range of 5.0 to 5.25%. The only exception is CE’s projection for the Bank rate to be as low as 4.5% by the end of the year, in line with their gloomier outlook for the housing market.

Most commentators expect house prices to remain broadly unchanged over the year, although CE are again the obvious exception, anticipating a particularly hard time for the market with a 5% fall in prices this year and a further 8% drop in 2009. The majority of commentators expect prices to be essentially flat over the year. Only Savills, with a projected 3% increase, expect anything more than 1% growth.

Transactions are expected to be harder hit than prices. All forecasters expect house sales to be sharply lower this year, compared to last. For those who publish an explicit forecast, market turnover is predicted to be down by 15 to 20%. With the exception of CE, analysts expect the anticipated slowdown to manifest itself in a less liquid market with fewer sales, rather than falling house prices.

Lending volumes are therefore expected fall from 2007, although remortgaging activity is expected to hold up in the mainstream market. Hometrack offers the gloomiest outlook for gross lending at £319 billion, while CML, and HBOS, anticipate a rather more modest decline from £362 billion in 2007 to £340 billion this year.

View from the Council of Mortgage Lenders

Around the end of last year, when many forecasters finalising their predictions for 2008, continuing uncertainty in mortgage funding markets was making the forecasting process even more challenging than usual. At that stage, some lenders were facing unprecedented funding difficulties. In response to market conditions, firms were re-appraising the range, pricing and availability of products. Some were tightening lending criteria and widening margins on some types of loan.

What remains unclear, even now, is how long the disruption of wholesale funding markets will continue. CML therefore do not know for how long in 2008 – and by how much – mortgage funding will remain more expensive than usual relative to the Bank rate, and the extent to which lenders will adjust their product range because of market conditions. Last October, CML predicted the Bank rate would decline by 0.5% this year, but credit market conditions may have strengthened the Bank’s desire to cut the rate by more than that, and such an outcome could, in itself, have a significant impact on wider mortgage and housing markets, as may any other action taken by central banks, individually or collectively, to address global problems in funding markets.

Despite the extra difficulty in forecasting, however, it is already clear that this will be a challenging year for the mortgage market. Credit market conditions mean the extent to which lenders will be able to meet demand for mortgages is uncertain. What is also uncertain is the strength of future demand for mortgages. Softening house prices in the final months of 2007 – and uncertainty over their future course – may deter house purchase this year.

The potential for wider economic disruption is also a factor. Rising oil, utility and food prices, the falling value of sterling and some wage settlements are stoking up inflationary pressures. That may constrain the Bank’s potential to cut interest rates to help offset higher mortgage funding costs and give a boost to the slowing housing market.

Improving conditions

Despite this, we may see an improvement in mortgage market conditions as the year progresses. Since the year end, inter-bank lending rates have declined, as expected, and early in 2008 they were lower relative to the Bank rate than for many months. Although CML do not know if this will continue, the Bank has shown a determination to bring down inter-bank lending rates if possible, and where conditions in the wider economy allow it to do so. But despite lower inter-bank lending rates, problems persist in funding mortgages in wholesale markets.

Over the coming months, the extent to which more normal conditions will return to wholesale funding markets should become clearer. That could help ease constraints on the supply of mortgages, at least for mainstream borrowers. As the year progresses, therefore, it may be that demand from consumers, rather than any constraint on the supply of funding, is the key determinant of the strength of mortgage and housing markets.

With interest rates likely to continue to fall, it may be that the worst of the mortgage supply problems are already behind us. By the middle of the year, therefore, conditions in mortgage and housing markets may have stabilised – and could begin to improve as 2008 progresses.

Buy-to-let investors remain confident

Buy-to-let investors have not been shaken by the credit crunch, with nine out of 10 of those surveyed in the final quarter of last year saying that they had no intention of selling their properties in the short term. Around 40% expected to increase their investment in the private rented sector this year, the survey found.

The figures emerged from the latest quarterly review published by the Association of Residential Letting Agents (ARLA) earlier this month. It showed that buy-to-let investors borrowed an average of 70% of the purchase price of a property, down from 74% in the previous quarter.

Only one in 12 expected to hold their property investment for less than five years. A mere 2% said their investment would be held for less than two years.

The survey found that well over half of investors were cautious in their approach, ensuring that they had a cushion, both of equity and rental income. Investors were also experienced. On average, buy-to-let borrowers had been landlords for more than six years.

ARLA welcomed the findings of the survey, particularly as it was undertaken well after the credit crunch had begun to bite. “The rental sector needs continual investment from private individuals as it still suffers from a lack of investment from the institutions,” the organisation said. With affordability for buyers remaining stretched, the rental market continues to play a key role in meeting housing need.

CML support ARLA’s advice to investors, in particular, its recommendation that borrowers should research local property markets, the demand for furnished property and rental values.

Lenders back low-cost scheme for armed forces

An affordable housing scheme – run by the government, with the support of lenders – is being extended to members of the armed services.

For the first time, personnel in the armed forces living in service housing in all regions will be able to apply for a shared equity loan to help them buy their first property, the government has announced.

Service personnel who qualify under an extension of the government’s low-cost home-ownership programme could boost their buying power by up to 32.5% by taking out a conventional mortgage topped up with a shared equity loan. The government’s scheme is currently supported by four private sector lenders.

Housing minister Yvette Cooper said the government wanted its scheme to help more “key workers” in the public sector, like services personnel, and other first-time buyers get a foot on the housing ladder.

by: Editor

Back to News

News Archive