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Soft targets

A report by the Council of Mortgage Lenders has sent a worrying shudder through those who have invested heavily in property rather than saving in more traditional vehicles such as pensions

The immediate outlook for the UK economy is largely regarded as uncertain. The report says overall growth has been the slowest in nearly two years, with consumer spending “splutter- ing almost to a halt”.

Although the report says the housing market is heading towards a slowdown rather than a crash, it also admits that original forecasts for the next two years may have been over-optimistic.

There has been a sharp decrease in year-on-year growth rates to -2 per cent from 15 per cent in 2004, 15 per cent in 2003 and 26 per cent in 2002.

CML head of research Bob Pannell, who is the author of the housing market forecast report, predicts there will be no further growth by Q4 2006, returning to positive growth, albeit just 2 per cent in 2007.

Abbey chief economist Barry Naisbitt says: “The CML findings fall broadly in line with Abbey’s own forecast, namely, that there is unlikely to be a sharp correction in house prices and house price growth is likely to be subdued for the next year or two. However, the outlook for transaction volumes remains favourable because interest rates are low and the demand for housing has remained stable. Coupled with relatively sta- ble consumer confidence, these factors will contribute to a flattening out of house prices, with small variations from month to month.”

Another factor bound to fuel concern is that arrears and repossessions have also risen although the increase has been modest in 2005, according to most professional bodies. The CML predicts the number of repossessions will reach 10,000 by Q4 2005 from 6,230 in Q4 2004. Meanwhile, it forecasts that the number of mortgages in arrears will go up to 115,000 by the end of this year from 92,090 at the same point last year.

Bradford & Bingley announced in its first-half results that repossessions tripled over Q1 and Q2. Last year ,it repossessed 66 homes while this year the figure crept up to 237. Although it is down-playing these figures, the value of the loans secured on repossessed properties soared from 4.3m to 32.2m. About half of repossessions came from the buy-to-let marketThe CML puts its hazard lights on when referring to BTL in its report. Pannell says: “We would expect to see a period of weaker activity in the BTL market as lower house price growth limits the potential for capital growth.”

Mortgage Trust marketing manager Nicola Severn says: “One of the consequences of a slower housing market is that the potential for short- to medium-term capital gains is not as strong as it once was. Although this does not spell a mass exodus of landlords, it has resulted in a reduction in activity from those who entered the market as speculators.

“Although a reduction in activity is expected from spec- ulators, genuine BTL investors are astute individuals who are likely to use market conditions in their favour.”

Severn says in a slowing owner-occupier housing market, landlords can find themselves in a strong bargaining position, which could result in rental increases and improving yields.

So there is a silver lining in every cloud, according to the BTL mortgage manufacturer.

But what of distributors? Abbey head of intermediary marketing and specialist lending Jeff Scott is optimistic. He says: “The intermediary market will not be significantly affected by fluctuations in house prices as the demand for housing and the remortgage market remain strong. The impact of regulation is more of an influence as this has shaped the structure of the market and how brokers deal with clients. The general consensus is there will be consolidation in the market and this may lead to a change in charging structures as intermediaries seek to preserve their revenue streams.”

Cartel director of compliance John Rattigan points out that four million borrowers are coming to the end of their product periods and could revert to lenders’ standard variable rates. He says intermediaries should be following up these opp- ortunities now.

He also believes there are hotspots around the coun- try that would be worth investigating to counteract the effects of a dampened market. He says: “London’s Hackney is definitely a hotspot at the moment with the announcement of the Olympic Games. Also, Middlesbrough is going through a regeneration programme, with many of the terraced houses being replaced by two- or three-bedroomed detached properties. There are important opportunities and potential in this area.”

Nevertheless, Rattigan believes lenders may need to become more flexible to deal with subdued market conditions.

He says: “Lenders have to be flexibility-driven and be more progressive. They may have to move away from just looking at income multiples to looking at more suitable methods of assessing mortgage approvals.”

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