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 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.