Hometrack House Price Forecast 2008

HOUSE PRICES FORECAST TO STILL RISE 1% IN 2008
Transactions and net mortgage lending volumes to fall by almost a fifth in 2008
Arrears and losses in sub-prime market likely to exceed current expectations

Hometrack has announced its forecasts for the housing and mortgage markets. Weaker market sentiment, stretched affordability levels and changes in the lending sector are set to result in a pronounced slowdown in the rate of house price inflation and mortgage lending over 2008. While acknowledging there are pockets of risk in both the housing and mortgage sectors, these are expected to remain contained with limited adverse implications for the broader housing and mortgage markets.

Property Transactions "a casualty" 

"The greatest casualty of the current slowdown will be property transactions rather than house prices," comments Richard Donnell, Hometrack's Director of Research. "While we expect the annual rate of house price inflation to slow to 1% by the end of 2008, transaction volumes are expected to fall by 17% over the year. Indeed, the next 12 to 18 months will be characterised by a general lack of housing for sale which will provide a support to pricing although this will result in much greater price volatility within local housing markets.

"The mortgage market is facing its most uncertain outlook for many years," comments Gary Styles, Hometack's Strategy, Risk and Economics Director. "A combination of slowing mortgage demand and tightening credit standards are expected to result in an 18% decline in net mortgage lending in 2008. There will be a continued flight to quality by mortgage lenders but arrears and losses in the 'sub-prime' market are likely to be greater than currently anticipated as certain types of borrower struggle to re-mortgage."

Prospects for the housing market.

"Housing market conditions have certainly turned over the last few months driven by affordability levels hitting a 15 year high and a weakening in market confidence. Affordability levels are stretched on most measures and a combination of rising incomes, slower house price growth and falling interest rates are expected to 'unwind' affordability levels to a more sustainable level," adds Richard Donnell.

"We do not anticipate widespread house price falls due to what we see as some major supply side constraints. Firstly, there is little evidence of any major increase in the supply of homes coming to the market for sale and this is acting as a support to prices. It is a trend that we expect to continue for the next 12 months, especially given our projections for a 17% fall in transaction volumes.

"Despite signs of falling demand and weaker market confidence the reality is that the majority of households simply do not need to sell their home. We estimate that only a quarter of sales each year are by households who actually need to sell. While changes in the mortgage market are likely to result in an increase in needs based sales, we do not believe that there will be sufficient numbers of these households to result in year on year falls in the headline rate of house price inflation.

"However this increase in housing 'illiquidity' is likely to result in much greater price volatility in local housing markets. We could well see situations next year where there will be continued strong demand for family housing in certain areas while in other parts of the same market weaker demand may feed into modest price falls. These are all trends that are likely to add to the complexity of trying to gauge the relative strength and direction of the housing market."

Outlook for the mortgage sector.

"We expect the various measures of mortgage lending to show a significant slowing over 2008. Over the next 12 months we expect net mortgage lending to fall by 18% with gross lending falling to its lowest level for 2 years from £359bn in 2007 to a projected figure of £319bn in 2008," adds Gary Styles.

"Higher perceived lending risks and more limited access to some sources of funding are encouraging lenders to focus on quality rather than volume driven market share. Lenders are returning their attention to the traditional prime mortgage market for future growth and development."

"Hometrack believe arrears and losses in the adverse credit market (lending to those with County Court Judgements and arrears histories) will be much higher than expected. Higher mortgage interest rates and a move towards wider margins will place vulnerable consumers at the risk of more serious arrears and of property repossession.

"The market looks set to become even more fragmented and the risks will become more concentrated in certain markets and sectors. Lenders will need to look at the potential impact of more extreme events on their lending businesses, particularly those in the more vulnerable non-prime sectors.

"In the short-term the risks are on the downside driven by declining house price expectations, higher mortgage rates and reduced mortgage supply. However, the risks around the medium term outlook are far more evenly balanced with lower interest rates, intense competition in the prime market and a structural shortage of housing supply, all positive drivers for the market."