View more on these topics

Stable prices could add up to trouble

We could see a stabilisation of house prices soon which would lead to a drop in new business volumes for brokers and over-optimistic lenders being left high and dry, says Frank Eve

Debt management company Debts.co.uk recently announced a jump in its annual profits to 2.1m – a sure sign that consumer debt problems in the UK are still growing at an alarming rate.

Citizens Advice Bureau reckons that it could take on average 77 years for the people contacting it for debt counselling to get back on financial track.

It has also indicated that one in 25 borrowers have missed a payment to their bank or building society which is equivalent to 770,000 people. This is a startling figure as it suggests the problem of mortgage default is more than six times higher than industry estimates.

The findings of the CAB survey, based on a sample of 2,057 adults, may exaggerate the problem but the sharp rise in personal insolvencies and the gradual increase in home repossessions and mortgage arrears we are seeing point to a growing burden of debt that may not be sustainable for consumers.

You may think that a growing pool of problem cases to help is good news for the adverse market. But a mortgage broker’s ability to help people who have overstretched themselves is based on the facts first they are home owners, second that they have enough equity in the property to leverage themselves out of their immediate problem and third that they have the income to sustain their new debt position.

All this is fine in a period when property prices continue to move ever upward, inflation is low and average incomes are rising. But the crunch comes if, or rather when, property prices stabilise, interest rates rise and consumers are squeezed. That economic scenario may come to pass sooner rather than later.

The Bank of England recently raised interest rates to 5% and if property continues to boom I think it will raise the base rate again. Unemployment rates are also on the rise and have reached 5.5%, while inflation is putting the squeeze on consumers’ pockets.

The retail price index rose in October to 3.7% and is set to hit 4% over the winter months. All this may add up to belts being tightened over the next year or so, which could in turn lead to a stabilisation in property prices.

The government and the BoE may think this is no bad thing as a number of reports emanating from Europe have suggested that property prices are too high in the UK.

I’m not suggesting any kind of a property crash is in prospect, just that there will be a stabilisation of property values. Yet this may be enough to see a larger jump in arrears and repossessions next year – and a drop in new business volumes for brokers.

The mortgage market in general has had a great year in 2006 with predictions of 340bn of new lending emerging. As a result of this, most lenders are anticipating even better times next year and are increasing their forecasts as a result.

The market may be in for a shock in 2007 if interest rates and arrears continue to rise, and lenders should do as much crystal ball gazing as possible before they set their budgets for next year.

Recommended

Lead generation is about quality rather than quantity

From Hugo Craggs Having just read the leader in last week’s issue on the subject of lead generation, I have a few observations to make. The first paragraph states that to ensure to a steady pool of new clients a broker must either obtain leads from their own website or via a lead generator. But […]

Enterprise appointment

Enterprise Group has promoted Mark Lovelock to director of corporate accounts. Lovelock has been with the firm for four years, first as regional business development manager and then as head of corporate accounts.

Almost half of advisers to incorporate REITs into portfolios

44% of financial advisers plan to incorporate UK REITs into their investment clients portfolios when they launch in January 2007. This is an increase of 10% in the past six months, reflecting a growing understanding and appetite for REITs.The results are part of a larger independent research project commissioned by reita.org and carried out by […]

FTBs can afford to pay more

Affordability models have been credited with a 0.3% rise in the price first-time buyers are able to pay for their properties, raising the average amount they pay for a house to £152,633.Figures from the Department for Communities and Local Government show the average house price leapt up from £197,000 in August to £198,552 in September. […]

Newsletter

News and expert analysis straight to your inbox

Sign up