October 29, 2008 | posted by Michael Baxter in House prices | comments (2) |

It will come as no surprise to learn that repossession levels soared in the second quarter of this year. The FSA released its findings yesterday, and they were broadly in agreement with data released by CML recently.

But it is when you peer beneath the surface that things get interesting.

Repossession levels in Q2 hit 11,054, 20 per cent up on Q1, but, more to the point, 71 per cent higher than a year ago.

The CML data came up with a slightly lower reading, but then FSA figures include homes with a second charge, and buy-to-let properties.

But the interesting bit comes with news on the number of homes in arrears. According to the FSA, no less than 312,332 mortgages were in arrears by the end of the second quarter. It appears that once mortgage holders go into default, they are finding it harder to catch up. It is not hard to guess why. In the past, they could use the rising value of their home as security for a mortgage top up. This option has been removed.

If markets were left to themselves, it is clear that we are about to see an enormous rise in repossession levels – they could easily pass the peak seen in the early 1990s

The government of course wants to stop that. It wants banks to be all soft and cuddly and nice to people who get behind. And frankly, the government may have a point. In the past banks were far too fast to take properties into possession.

The danger is simply this. If house prices continue to fall, and if unemployment starts to rise, the number of people in arrears will just grow and grow. The real risk is that any government action will just slow the inevitable – and that could make things a whole lot worse in the longer-term.

August 27, 2008 | posted by Michael Baxter in House prices | comments (1) |

It is quite difficult to keep up with all the data on mortgage lending. The big three – the Council of Mortgage Lenders (CML), British Bankers’ Association (BBA) and Bank of England – have been taking it in turns to announce some new record fall in mortgage lending for most of this year.

The last week was no exception. Well, actually, the big falls may have actually come to an end now. But the latest data was fascinating, all the same.

According to the BBA, mortgage lending in July was the same as June. So yippee for that. With 105,610 mortgage approvals in July, with a combined value of £11.8 billion, the volume of all approvals was 40 per cent down on last year. More to the point, re-mortgages were 21 per cent down on last year, while mortgages for house purchases were less than half the level seen in August 2007. But this is the statistic to really make you sit up: in July 2008, according to the BBA, 22,400 mortgages for house purchases were approved. In 2002, the total number of mortgages approved for house purchases was around 90,000. In other words, in 6 years the number fell to less than a quarter of the original level.

The CML data, by contrast, illustrated the dramatic change in fortunes for the buy-to-let sector.

Buy-to-let loans in the first half of this year were 18 per cent down on the same period 12 months earlier. The second quarter saw a 21 per cent reduction on the same quarter last year, and a 25 per cent reduction on the peak seen in Q3 2007. New buy-to-let loans, that is to say excluding re-mortgages from the equation, saw a 33 per cent drop on Q2 2007. This contrasts with a 45 per cent fall in the overall mortgage market from the same period.

If anything, Capital Economics understated the situation when it said: “Even if the credit squeeze eases, we doubt there will be a rebound in BTL lending activity. After all, with the economy now slowing sharply and further substantial house price falls expected, this is hardly an environment which can encourage BTL mortgage demand.”

But the most interesting aspect of these reports was emphasized by Shelter. “Between the first half of 2007 and the first half of 2008 the number of BTL mortgages ending in repossession rose by 100 per cent, compared to a 48 per cent rise across the mortgage market as a whole,” it said, after analysing the CML data.

Shelter, being Shelter, chose to emphasise the implications of this data for tenants. Adam Sampson, Chief Executive of Shelter, said: “These figures show the shadow of repossession is no longer just cast over homeowners, but also thousands of innocent renters who have no idea how close they are to eviction.

“Sadly, the impact of repossession can be even greater for tenants, who, despite paying rent on time, can find themselves with very few rights and the first they even know about it is when the bailiffs start banging on the door.”

August 18, 2008 | posted by Michael Baxter in House prices | comments (0) |

Before we start, understand this: there are three stages in the property possession process. First the claim is issued; then the claim is made, and only then is the property taken in possession.

Here’s the bad news. There has been a sharp rise in the first stage in that process – 2008 is now on course for being the second worst year since 1990.

Here’s the good news. The second stage in that process has not seen such a big jump. As for the third stage, well, the data isn’t out yet.

According to data from the Ministry of Justice, in 1991, 186,640 possession claims were issued. That was the worst year since the beginning of the last decade. The second-worst year was 1990, which saw 145,350. Halfway through 2008, however, the figure stands at 79,000, so if the second half of this year is like the first half, the total will hit 158,000.

Now, just because a claim has been made it does not mean the property will finally be taken into possession. For example, in 1991 when those 186,640 claims were made, just 75,000 properties were actually possessed.

And, of course, ultimately it is possessions that count. And in this respect there is good news. In the second quarter 28,658 mortgage possession orders were made on a seasonally adjusted basis, that’s 24 per cent higher than in the second quarter of 2007 and 4 per cent higher than in the first quarter of 2008. But, if the second half of this year is like the first, total orders made will come in at around 112,000. That will be the worst year since 1994. But 1990, ’91, ’92, and ’93 all saw higher figures than that.

Then again, all possessions start with a claim. So, possession claims issued give an indicator of the future. One assumes that if possession issues are rising now, then there will be a corresponding rise in orders made next quarter, and then a rise in properties taken into possession.

Capital Economics, however, said: “With households now having to wait for nine months before State benefits covering mortgage payments are paid out [in the event of unemployment] (compared to two months during the early 1990s), it is perhaps not surprising that lenders want to use a court action and the threat of possession as a wake-up call for borrowers who have fallen behind with their payments.”

So maybe the rise in possession claims issued does not necessarily mean a sharp rise in actual possessions down the line. Then again, anecdotal evidence has suggested banks are less patient with late payments than they were in the early 1990s.

So it seems the data so far is inconclusive – but there is at least reason to believe possession levels are set to approach the 1991 level soon. The resulting rise in properties for sale will, of course, lead to an increase in supply of houses at a time of tiny demand – the result will probably be continued falls in house prices.

August 11, 2008 | posted by Michael Baxter in House prices | comments (0) |

And so possession levels rise again. Can anyone be surprised by that?

The proportion of all mortgages on which possession occurred in the period – was 0.16 per cent in the first half of the year, up from 0.11 per cent in both the first and second halves of 2007. The possession rate now is similar to that of the late 1990s, says the latest data from the Council of Mortgage Lenders (CML).

CML has been predicting for some time that possessions will hit 45,000 this year. That is high, but quite modest compared to the early 1990s. And CML went to pains to emphasise this:

Commenting on the current situation, CML director general Michael Coogan said: “The number of people facing difficulty needs to be kept in perspective. The good news is that most people are coping well and continuing to pay their mortgages in full, despite the higher costs of food and fuel and the higher mortgage rates now prevailing in the market for those coming off cheaper original deals.

“But it is inevitable that more borrowers’ coping strategies will come under pressure in current conditions than in the unusually benign years of the last decade. That’s why lenders, government and the advice sector are working closely together to minimise the impact on borrowers.”

The 45,000 prediction for this year may be right, but never forget, we are still in the early stages of the economic downturn. Up to now unemployment has only risen modestly, but an increasing number of reports have predicted this will change soon. Of course it will.

As unemployment rises, and house prices fall further, one would expect possession levels to rise dramatically.

There is growing evidence that banks are being less patient with mortgage holders who fall behind in payments than they were in the early 1990s. This is, of course, very dangerous. If the banks start implementing possession more rapidly, house prices will fall even faster.

Burt don’t forget this. In the UK, many borrowers had been using the rise in the value of their home to pay off credit card borrowing. As house prices fall, and credit becomes harder to obtain, this option is being removed.

A famous economist called Hyman Minsky, once talked about three stages in the development of a credit bubble. Stage 1, borrowing is affordable. Stage 2, borrowers can’t afford to repay the loan, but they can afford to pay interest. Stage 3, they can’t even afford the interest, and may borrow from elsewhere to repay existing loans.

The three stages are then followed by what has become known as the Minsky moment; all of a sudden credit dries up – and backlash against the untenable borrowing occurs.

We are surely at that stage now. It will be a big surprise if possession rates do not rise sharply in the second half of this year and 2009. This will of course mean a sharp rise in the number of properties for sale, leading to further falls in prices.

May 12, 2008 | posted by Michael Baxter in House prices | comments (4) |

Price is determined by demand and supply and, right now, in the housing market demand is low. But then again, so too is supply.  Builders have been announcing plans to put their current projects on hold, while homeowners are putting off plans to sell their property, or properties.

But then again, sometimes people have to move.     Maybe they have changed jobs and need to move to a new area,  maybe their family is growing and they need more space, maybe they need the money.

The longer the downturn lasts, the less likely it is people will be able to hold on.

And that brings us to the latest figures on possessions.

You won’t be surprised to hear that they weren’t good, but then again, we are still way short of the levels seen in the early 1990s.   In 1991, no less than 75,000 houses were taken into possession.  Contrast that with 2007, which saw just 27,000  taken into possession. Now, for those affected this was a disaster, but many have taken comfort from the fact we are nowhere near the levels of 16 or 17 years ago.

Housing Minister Caroline Flint said: “It is important to recognise we are dealing with an entirely different situation in the market from what was experienced in the early 1990s.

“The fundamentals of the housing market remain strong with high employment, low interest rates, and long-term demand for homes from first-time buyers.”

Property bulls have often cited the relative low number of possessions compared to the early 1990s as evidence that this time it is different.

But what they overlook is that, actually, in times of rising house prices and easily available credit, it is actually quite difficult to get your home re-possessed – you have to be really unlucky.

After all, if you run into difficulties you can just get a top up on your mortgage or, worst case, you sell.    Recent years have seen the emergence of packages in which some companies will buy your property off you, and rent it back; again, this will have helped reduce the overall numbers.

It may be more meaningful to look instead at the number of claims made, and issued.

In 1991, 188,649 claims were issued and 142,095 orders were made.    Of the orders made, just over a half finally led to properties being taken into possession.

In 2007, 137,607 claims were issued, and 95,187 orders were made, but this time less than a third of those properties were actually re-possessed.

On Friday the latest data, this time for Q1 of this year, was out.    40,424 claims were issued, and 26,930 orders were made.   The Ministry of Justice, which publishes these figures, only publishes the number of properties taken into possession on a half-yearly basis, and we will have to wait another three months for that information.

The real concern is this. If the first quarter of this year proves typical – and let’s face it, the economic conditions have been getting a lot worse of late, then this year will see 160,000 possession claims issued, making 2008 the second-worst year since 1990, but intriguingly, 2008 will see only 104,000 orders being made, lower than 1990, 1992, 1992, and 1993.

Why is that?

Well, in part, there is always a time lag with these things.  Claims maybe issued, but orders are not made straight away, and the property is only taken into possession down the line.

In part, as we said earlier, high house prices and the easy availability of credit,  gave homeowners other options.

But in the credit crunch of 2008, some of those options are disappearing – certainly it is now a lot harder to just top up your mortgage.   This could explain why recent borrowing figures showed credit card borrowing rising.

More worrying, if the rest of this year proves even worse for claims being issued – and with house prices falling, with wage inflation lagging behind retail price inflation, and with credit becoming so much harder to obtain – it may well do,  then the 1991 record may be broken.

The real tragedy of possessions, however, is what occurs when homeowners have negative equity.

The good news: according to a recent report in the FT, house prices would have to fall by 25 per cent before negative equity rates reached similar levels seen in the early 1990s.    

If house prices were to fall by 15 per cent, that would leave just 0.5 million people with negative equity.    

However, if prices fall by more than 20 per cent, then the number in negative equity rises rapidly.     A 20 per cent fall would mean 1.2 million with negative equity; a 25 per cent fall, 1.8 million; and a 30 per cent fall, 2.5 million.

To find you can’t afford to pay the debt, and at the same time you have negative equity, is a true tragedy.

And it must surely be the fear that this may happen that could drive people to sell. 

PS
One of the hot topics relating to mortgages is PPI insurance.   Lately there has been a media backlash against this type of insurance – suggesting many borrowers have been persuaded to take out schemes they did not need.

Recently, Defaqto, which owns Investment and Business News, has warned this could be very dangerous.    Brian Brown, head of Defaqto Insight team says, “With the economic slowdown, now is surely the time to make sure you are adequately covered from the possibility of losing your job and not being able to repay your mortgage.”

January 30, 2008 | posted by Michael Baxter in House prices | comments (1) |

A couple of weeks ago, David Smith, economics editor for The Sunday Times, described much of the talk about what will happen when a million or so people come off fixed rate mortgages this year, as daft. Well, if he is right, then the Financial Services Authority can count themselves amongst the daft. Because yesterday, it gave another warning about problems ahead, as these mortgages re-set.

Meanwhile, in the US we were given a foretaste of what could happen here, when two pieces of news hit the news desks, both telling a tale of woe on property ownership and possessions in the US.

Actually, before you read on, you better sit down for this, because RealtyTrac said yesterday that total foreclosure filings in the US leapt 97 per cent last year. In fact, 268,532 poor US souls had their homes repossessed, and no less than one per cent of all US households hit some stage in the foreclosure process.

It’s funny, isn’t it. Some blame the current financial crisis on little more than a misunderstanding. No one is quite sure which banks are in it up to their chest. Well, actually, the reality is far more serious. The reality is, banks completely got their risk analysis wrong, and as a result, one million Americans are suffering the torment of being unable to pay their mortgage.

And while a few years ago, many would-be home owners were California dreamin’ about their new home in the State of Arnold Schwarzenegger, by 2007, many of those dreams had turned to nightmares, as 66,000 Californians were turfed-out of their home. In fact, in total, 250,000 foreclosures were served in the State. The State holding the dubious honour of being second place in the list of states with the most foreclosures was Florida, while Michigan too had a raw time of it.

As for home ownership in the US, according to the US Census Bureau, home ownership suffered the biggest one-year drop on record. In all, home ownership fell 1.1 per cent, to 67.8 per cent of all occupied homes, which is apparently similar to the level in 2002, before the mass take up of subprime mortgages.

Could it happen here? Well, the FSA issued a nasty warning yesterday. You will recall, 1.4 million mortgages are due to come up this year, and now the FSA is saying “that mortgage payments would rise by approximately £210 per month as a result of the rise in market interest rates over the period since the consumer took out the fixed rate, were the fixed-rate mortgage to be replaced by a standard variable-rate mortgage.” It added, “In addition to higher mortgage rates, many consumers are also faced with lenders lowering LTV [loan to value] ratios. There is a risk that some consumers could find it increasingly difficult to obtain funding given the tightening of lending criteria and the reduction in the LTV ratios. “

It warned that around one-third of all mortgages approved between 2005 and 2007 contained an element of higher risk, and of course it is holders of these types of mortgages who will have the biggest problem when their fixed rate terms come to an end. The FSA said, “The spectre of consumers having debt that exceeds the value of their property is not something that has materialised yet but it is certainly a risk we have to take seriously. We are also concerned that consumers are ill-prepared and have placed too much reliance on their ability to obtain cheap credit and housing wealth to sustain their consumption.”