Steady but not glorious period ahead

It has been a great six months for the mortgage market. Monthly lending records have been tumbling after a surge in confidence early this year.

The housing market has outperformed all expectations, while innovation and competition have intensified. These trends were confirmed with the dramatic upward revision of the Council of Mortgage Lenders’ predictions for 2006, which include the expectation of gross lending topping the 300bn mark for the first time.

In February, when the CML was making its first round of predictions I felt it had misjudged the mood of the market, although predictions are notoriously difficult. Players in the housing and mortgage markets were feeling confident after the soft landing of 2005.

Despite all this good news, readers of the mortgage press in the past month could be forgiven for being confused about the outlook for the rest of the year. There are mixed messages flying about. The CML’s predictions are strong but there is more worrying news of an expected rise in interest rates by the end of the year, with fixed rates already affected.

This change in interest rate expectations means repossessions are likely to continue to rise moderately. Market confidence has taken a hit. Some writers have even taken the opportunity to put about scare stories of unsustainable debt mountains and accusations of irresponsible lending. Which of these outlooks is likely to prove most accurate?

When we look at the evidence it is clear that the scaremongers are being irresponsible. They are twisting information to make controversial headlines. The underlying indicators for the market remain strong. Most importantly, the wider economy is looking healthy with indicators suggesting an end to the upward trend in unemployment. Inflation is under control and even if there is quarter point rise in the base rates it will still be low and stable by historical standards.

So we are left wondering how to reconcile strong market predictions with a seeming decline in confidence about the next six months. There are reasons to be positive. While it would be sensible to plan for an interest rate rise, there are indications this may not be necessary.

Inflation has remained subdued despite high energy prices. Financial markets are showing some instability and the sterling exchange rate has appreciated. These factors point towards an increase in the base rate later rather than sooner.

The revised CML figures are more realistic and in line with the market’s mood. We should expect the markets to have a steady rather than glorious second half to the year, but we should remain confident.