Data from the Royal Institution of Chartered Surveyors and the Council of Mortgage Lenders paints a picture of falling prices, fewer transactions and collapsing lending volumes.
From the perspective of brokers and lenders this is grim indeed. Even the deposit-takers that have escaped the worst effects of the liquidity crisis will feel the pinch given such widespread declines. Fewer borrowers obtaining smaller loans means less business for lenders.
But the market is returning to equilibrium. Whether we feel good or bad about it depends on our point of view. When drunk, we seldom worry about hangovers. Although a hangover is unpleasant, it’s a sign of the body recovering from excess.
Similarly, slowing house price growth and falling volumes weren’t given a second thought while the good times rolled. But the morning after feeling is impossible to escape when confronted with the stark reality presented by RICS and the CML.
While hungover, we say we’ll never drink again and similarly the housing and lending markets have made the pledge to change their ways. LTVs have come down significantly and house price growth has slowed dramatically. The evidence of the market’s movement towards equilibrium is encouraging. Credit quality has also improved in recent months. This will restore confidence as the performance of 2008 assets will prove to be better than those originated between 2005 and 2007. This is a step in the right direction.
But unlike in the US, credit quality and aff-ordability were never the biggest problems here. Our market suffers more from a fundamental fault in the capital markets’ operations than poor mortgage performance, although the fault looks likely to breed worse performance this year.
As banks’ results are published, hopefully the markets will begin to believe that the worst of the liquidity crisis is over and normal service will resume.
Unfortunately, there are still substantial numbers of credit products in many institutions. Until they are worked through it’s difficult to see how the markets can recover completely. So this year will remain difficult, regardless of efforts to tighten lending criteria.
The cruel irony is that the longer it takes banks to sort themselves out, the greater the impact on the housing market will be. If prices fall and arrears rise, banks’ position will become worse and it will take longer to surmount the technical difficulties in the market.