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Don’t be fooled by the drop in home repossessions
On the face of it, there was good news for Britain's housing market this week as the number of repossessions fell. But don't get too excited, says Matthew Partridge. UK house prices are still heading for a 'double dip'.
The banks only repossessed 8,500 homes in the second quarter of the year, according to the Council of Mortgage Lenders (CML). That's a drop of 1,000 on the first quarter, and the lowest number in nearly two years.
The CML now reckons that the total number of repossessions this year might be even lower than its 45,000 forecast.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
The CML report also highlighted that debt is still a major problem for many homeowners. In total, 157,400 households still have arrears that are equivalent to at least 2.5% of the total value of their mortgage. This is down only 400 on the first quarter. And in fact, the number of those with more than 10% of their mortgage overdue went up.
This suggests that the fall in repossessions is due to banks being lenient, rather than borrowers being better able to repay. As the CML puts it: "The figures show that lenders, borrowers and debt advisers are working together to get through the current period of economic difficulty and keep mortgage possessions in check".
In many cases this makes business sense. To foreclose on a family and then resell the house involves transaction costs that outweigh the costs of allowing debtors more time to repay their loans. It also generates bad publicity at a time when the Bank of England has tied cheap funding to increased lending.
However, in the case of those with very large arrears, it may be a sign that the banks simply don't want to take a loss on their loan. And that's bad news. Because if they're still too wary to act on even the most delinquent lenders, that shows just how scared they are to reveal the true state of their balance sheets.
Why does this matter?
The problem is that constantly deferring debts forever is not a sustainable strategy. Eventually the banks will have to either take action against tardy payers, or formally write down the amount. And if prices start to fall, banks may want to get the property on the market to salvage any remaining value.
So the bottom line is that although repossessions are down, the problem has not gone away. In fact, the increase in the number of hardcore debtors may mean that they may start to increase again. This would lead to a flood of properties hitting the market, putting further downward pressure on prices. As my colleagues Phil Oakley (What is UK property really worth? Here are three ways to find out) and John Stepek (The squeeze tightens on the UK housing market)have argued, a housing 'double-dip' is still very much on the cards.
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