Outlook for mortgage and housing markets

Data form the Council of Mortgage Lenders (CML) confirms that lenders are showing forbearance to borrowers who fall into arrears, and that a range of government schemes is also providing help. They have also lowered their prediction for the number of mortgage possessions this year from 75,000 to 65,000.

The CMLs new forecast is for net lending to fall by around £5 billion in 2009. This represents a significant improvement on the £25 billion contraction in the market that had originally been anticipated, and partly reflects the extensive fiscal, monetary and credit support measures that have been put in place.

Despite these encouraging developments, the CML believe that it is too early to predict a robust recovery in the housing market. They will not publish forecasts for 2010 until later in the year, partly because there is still considerable uncertainty about a range of factors that will affect the underlying strength of mortgage and housing markets next year and beyond.

In the short term, the housing market is likely to be heavily influenced by unemployment – now rising strongly – as well as the number of hours worked by people who stay in their jobs, trends in earnings and the impact of negative equity on property transactions.

The outlook for mortgage and housing markets will also depend partly on the efforts households make to reduce their levels of mortgage debt.

Mortgage repayments
The Bank of England publishes monthly data on mortgage repayments split between:

payments on redemption; that is, where payment clears the outstanding debt completely and discharges the mortgage;
regular repayments arising from capital-and-interest mortgages, where each monthly payment covers not only the interest on the loan but a slice of the principal, with payments of capital increasing as the mortgage matures; and
ad hoc lump sum payments that reduce but do not clear the outstanding balance.

Capital repayments are dominated by payments on redemption and these are closely linked to house sales and remortgaging activity. Typically, however, such transactions will be matched (or exceeded) by gross new lending to the borrower. As such, they are unlikely to tell us much about exposure to debt, despite the fact that both house sales and remortgaging have fallen sharply over the last year or so.

Leaving aside payments on redemption, however, Bank of England data shows that regular and lump sum capital repayments totalled £46 billion in 2008.

Interest rates
As one might expect, the regular repayments associated with capital-and-interest mortgages have risen significantly since the end of 2008 alongside the very sharp reduction in interest rates. The maximum cumulative increase in regular repayments appears to have been around £400 million a month.

Broadly speaking, this is perhaps a little above what might have been expected as a result of the automatic tendency of regular capital repayments on capital-and-interest mortgages to rise when interest rates fall. So, it is at least plausible that a number of borrowers have decided to maintain their mortgage payments at the level they were before interest rates began to fall sharply, thereby accelerating their capital repayments still further.

Borrower behaviour
The CMLs calculations suggest that the household finances of variable rate borrowers have improved by around £20 billion a year as a result of the dramatic decrease in interest rates since the end of 2008. However, as much as £15 billion of this is not showing up in higher mortgage repayments.