The CML released a downbeat market forecast this morning, reflecting buyer concern about a possible future hike in interest rates and weak consumer spending. However it’s not all doom and gloom; the good news is that the economy has grown sharply in the second quarter of this year – the largest quarterly increase in four years, unemployment is slightly down and gross lending figures from the CML show overall lending increased by 5% in July 2010.
The numbers of those failing to keep up repayments on their mortgages and the numbers of repossessions have fallen but despite this, householders remain cautious. The unemployment figures, whilst showing a small improvement in the number of full time workers back in employment, are mostly reflective of the fact that the numbers of part time workers has increased more substantially. Householders have undoubtedly been helped in keeping up their repayments by the current low interest rates, but these rates cannot last forever, and the prospect of a steep rise in rates means that current renters and prospective buyers are looking before they leap into home ownership.
Of those who have leapt, over 60% have perhaps understandably gone for a fixed rate mortgage deal, compared with March 2010 when 53.9% of mortgage deals were variable. Whilst there are undoubtedly a good range of fixed rate deals on the market at the moment, buyers surely have one eye on the current above-target inflation and the impending VAT rise to 20%. This is despite the Bank of England’s forecast that due to the austerity measures put in place by the coalition, interest rates are likely to remain at or near current levels for some time to come. The coalition’s Budget has also damaged consumer confidence in the short term, as prospective buyers contemplate massive public sector job cuts and the scaling back of the safety net put in place to help those most at risk of losing their homes. Householders continue to strictly budget their household finances and are still nervous of what may be around the corner.
The Ernst and Young ITEM club confirmed this view, stating that consumer spending will remain weak while households repair their balance sheets. Although the club does not expect house prices to fall in the next 12 months, it is forecasting that market activity will take a long time to reach “normal” levels.
Commenting on the gross lending figures released by the CML today, David Whittaker, managing director of Mortgage for Business said: “Although this is a slowdown in lending compared to last year, investors are still capitalising on excellent opportunities at the moment. Despite some small monthly fluctuations, house prices will remain around their current levels for the rest of the year. And new lenders entering the market have given investors more choice in buy-to-let products. These factors have helped the property investment sector. But lending overall will remain subdued as we move into 2011 as the economy faces up to the funding gap, regulation becoming increasingly tight and the recovery advances more slowly than expected. Inflation remains above target, but the base rate will be held for as long as possible – and while it is low there will be investors looking to take advantage.”
According to rightmove.com the house prices index fell in August 2010 by 1.7%, an average of just over £4,000 and a steep decrease from last month’s fall of 0.6%. House prices have fallen from £236,332 in July to £232,241 this month as oversupply coincides with holidaying buyers. In fact, this August has seen the highest levels of new property on the market for over three years. So, as public sector workers read the small print on their contracts, first time buyers continue to save for that all-important deposit, homeowners enjoy the current low interest rates but brace themselves for what may be coming and government plans imminent spending cuts, the mood in the housing market continues to be cautious.
The rest of 2010 seems likely to see lower overall lending and transaction rates compared to the same time last year.