Lenders predict UK property crunch as rates take effect

Published 26th Jul 2007

Higher interest rates are set to provoke a crunch in Britain’s property market next year with the weakest growth in prices for 13 years, the Council of Mortgage Lenders (CML) said yesterday.

The CML also said that consumers would have to cut back on spending as they struggle to cope with a painful increase in mortgage repayments.

Michael Coogan, director-general of the CML, said that house prices would grow at half their current rate by the end of the year and would rise by only 2 to 3 per cent in 2008.

According to data released yesterday by the Department of Communities and Local Government (DCLG), house price inflation stood at 10.9 per cent in May.

The slowdown predicted by the CML would give the property market its worst year since 1995 and would probably mean a real-terms cut in the value of most people’s homes.
The CML said that it had trimmed its January forecast of a 7 per cent price rise this year and a 5 per cent rise in 2008 as interest rates had risen more than expected.
Mr Coogan said: “I don’t believe there will be a crash, but clearly a slowdown is more likely in an environment of higher interest rates.”

Homeowners who took out two-year fixed-rate mortgages in 2005, when the Bank rate was just 4.5 per cent, will now have to find at least an extra £100 per month to cover their mortgage repayments when they remortgage, the CML said.

“There will be some, particularly first-time buyers, who will need to change their spending patterns or social behaviour to be able to continue to afford mortgages at this sort of level,” Mr Coogan said.

That would force consumers either to eat further into their savings or to cut back on their spending, damaging retailers’ returns, he said.

“We’ve already seen on the consumer credit side that loans have been reduced and people are looking to repay their credit card and other debts. That trend is likely to continue.”

The latest figures show little sign that a sharp housing downturn is on the cards.

The DCLG statistics, generally seen as a robust but lagging indicator of the market, said that house prices had risen 0.7 per cent in May and by 2.7 per cent in the three months to May, the second-strongest figures for seven months.

Last month Nationwide, the building society, reported that house prices had surged by 1.1 per cent, taking annual house price inflation to 11.1 per cent.

Seema Shah, property economist at Capital Economics, said: “While the DCLG index continues to report solid house price growth at the national level, the regional picture is hinting at slower house price growth to come.

“Our forecast remains the same – we expect markedly weaker house price growth by the end of the year.”
The average house price in May stood at £211,056, the Government figures showed.

London, Scotland and Northern Ireland enjoyed house price growth of more than 10 per cent, with the pace accelerating in the capital. In Northern Ireland prices have risen by more than 50 per cent over the past year.
In contrast to the robust data from the Government and lenders, the Royal Institution of Chartered Surveyors reported last week that prices in June had risen at their weakest rate since the start of 2006.

A Bank of America report suggested last week that there was a one in five chance that the British housing market would crash in the next two years.

— Land Securities, Britain’s biggest real estate investment trust, said that it would buy back shares as it continued to meet sales and lettings targets, despite a cooling British property market.

Shares in the company lost early gains and closed at £17.49 amid concerns that British property stocks were overpriced with limited short-term growth prospects after interest-rate rises.

“The first quarter has seen extremely high levels of activity across the group,” Francis Salway, Land Securities’ group chief executive, said in a trading statement for the three months to June 30.
Gabriel Rozenberg, Economics Reporter

Source: ' Times Online '

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