Mortgage struggles less bad than predicted

House keys8 August 2012

A Government report on mortgage arrears and repossessions published today suggests that policy measures have slowed down the rate of repossessions. The report, which builds on ESRC-funded research, also predicts a more positive outlook for this year as a whole than the forecast by the Council of Mortgage Lenders.

The New Forecast Scenarios for UK Mortgage Arrears and Possessions report draws on research from the ESRC-supported Spatial Economics Research Centre (SERC). The authors, SERC researchers Janine Aron and Professor John Muellbauer, have developed six economic forecast scenarios stretching from the fourth quarter of 2011 to the fourth quarter of 2015.

The report updates previous work where the researchers have used UK data on mortgage arrears and repossessions to forecast trends for the near future.

"A range of economic forecast scenarios for forecasts to 2015 reveals the sensitivity of mortgage possessions and arrears to different economic conditions, highlighting potential risks faced by the UK and its mortgage lenders," the authors caution. However, they still conclude that the outlook could have been much worse.

"It is likely that the combined impact of policy reduced the possessions rate by at least 23 per cent by 2011 Q3 (third quarter) compared to what it otherwise would have been," they comment in the report.

The report covers a range of possibilities for the next three years, including negative, 'no change' and positive scenarios. In Scenario 1 - the neutral 'base' scenario - it is assumed there is no change in the so-called 'loan quality' and 'forbearance policy shift' indicators. In this scenario repossessions are forecast to be little changed from 2011, while the six-month mortgage arrears rate may rise a little, mostly due to higher unemployment. Annual possessions are 10.6 per cent higher in 2013 than in 2011, and possessions numbers increase further in 2014 and 2015.

The positive high-growth Scenario 2 assumes that interest rates are held down for longer, unemployment falls sooner and growth in incomes and house prices is a little higher. This model shows a "substantial and almost continuous decline" in all three default indicators. The annual number of possessions declines from 36,200 in 2011 to 26,400 in 2015 – while the number of mortgage arrears of six months or more falls from 125,500 at the end of 2011 to 89,300 at the end of 2015.

A more pessimistic Scenario 3 assumes low growth, where interest rates rise sooner, unemployment rises for longer, and growth in income and in house prices is more subdued. The number of annual repossessions rises from 36,200 in 2011 to 148,300 in 2015.

In the other scenarios the researchers explored the impact of positive and negative changes in the default indicators, as well as applying economy forecasts from the Oxford Economics consultancy.

But none of the scenarios, including the most negative ones, came close to the numbers from the Council of Mortgage Lenders' (CML) forecast from December 2011, which had predicted a rise in numbers of possessions from 36,200 in 2011 to 45,000 in 2012. The authors suggest this is due to only a moderate impact from unemployment, as well as a year-long 'feed-through' period before the effect of rising unemployment impacts the figures.

"Whilst it is still conceivable that the CML forecast for 2012 could prove right, this would in our view need a substantial early rise in mortgage rates combined with a substantial early fall in house prices. Most observers of the markets currently consider this quite unlikely," the researchers conclude.