In its News and Views the CML says net lending is expected to drop from £9bn in 2010 to £6bn in 2011.
The number of arrears is predicted to rise from 175,000 this year to 180,000 next year while repossessions will increase from 36,000 to 40,000.
It states: “These factors, along with the regulatory constraints imposed by increased capital requirements and the possibility of rule changes being considered by the Financial Services Authority, have influenced our forecasts for next year.
“Activity in housing and mortgage markets is set to remain broadly flat in 2011 and we do not envisage a return to the lending levels that characterised the middle of the last decade for many years to come.”
The CML says it expects UK growth to be a little over 2% next year, the risks are mainly on the downside.
It says that the UK economy has begun a process of long-term re-balancing and public sector spending cuts imply a difficult jobs market in the coming years.
With households also seeking to reduce levels of indebtedness, it says demand for mortgages may be subdued for some time.
It claims the prospect of the FSA’s Mortgage Market Review is re-enforcing a cautious attitude among lenders.
And it says that a lack of funding will make it difficult for first-time buyers.
It states: “Lenders are likely to continue to have only a modest appetite for advancing mortgages at higher loan-to-value ratios. This is understandable in an uncertain operating environment, but it is now being reinforced by the higher capital requirements for low-deposit loans.
“As capital requirements are tightened through the new Basel III rules, lenders will continue to channel funding towards lower-risk customers, including those with larger deposits.
It also says remortgaging levels will remain low due to low interest rates despite a growing number of borrowers coming to the end of introductory deals and reverting to their lenders’ standard variable rate.
It adds: “The outcome of the Financial Services Authority’s ongoing mortgage market review continues to be a major and unhelpful source of uncertainty for the lending industry. Firms do not know when the FSA will issue firm rules or whether it will modify its current excessively risk-averse approach. This uncertainty will itself reinforce lenders’ caution.”
Next year, it expects the number of transactions to total 860,000 which is very similar to the levels of the three previous years.
The trade body claims that the recent level of sales means that each property in the UK’s stock of 18 million privately owned homes is now only changing hands at a rate of once every 20 years.
The £250,000 stamp duty exemption for first-time buyers is scheduled to come to an end in December next year, and this is likely to give a modest boost to sales as 2011 progresses and particularly as the deadline gets nearer.
But the effect of this is more likely to bring forward transactions, rather than stimulate any significant new housing market activity.