Talk of falling house prices is in the air, most notably from Nationwide Building Society, which last week warned that pressure on household budgets had created “a risk of a downward movement in house prices”. That, along with four consecutive interest rate rises from the Bank of England, has also generated concern about a rise in home repossessions.
These have been suffered during previous housing corrections, most notably during the crash of 1990-95, when 345,000 homes were repossessed. During the worst year, 1991, repossessions were running at nearly 1,500 homes a week, which, in turn, fuelled further house price falls as lenders sought to recoup losses by selling repossessed homes.
The Centre for Economics and Business Research warned last month that repossessions could rise by between 40 per cent and 50 per cent this summer, equating to almost 4,000 borrowers losing their homes every three months, and that, if the Bank Rate was to hit 2 per cent by the end of the year, repossessions could double.
Latest figures from UK Finance suggest that repossessions are already creeping up. The industry body reported last week that during the first three months of the year 580 homeowner mortgaged properties and 370 buy-to-let mortgaged properties were repossessed by lenders. That was 240 more in total than during the final quarter of 2021.
Yet there are reasons to hope that the experience of the early 1990s will not be repeated. The first is that the recent rise in repossessions has nothing to do with squeezed household budgets and everything to do with courts ploughing through a backlog of cases built up during the pandemic. Repossessions are also rising from a very low base because of the possession moratorium put in place by the government at the start of the pandemic in March 2020, which lasted until April last year.
The second is that households are not, in general, borrowing on the high loan-to-value ratios they did before the early 1990s’ housing crash. Nationwide, the country’s second largest mortgage lender, said last week that its typical home loan was now worth 52 per cent of the property on which it is secured, down from 56 per cent last year, while Santander, the third largest player, recorded an average loan-to-value ratio of 40 per cent last month.
Third, mortgage rates remain undemanding. HSBC, for example, is charging 2.54 per cent for a three-year fixed-rate deal with a loan-to-value ratio of 60 per cent. By contrast, the typical mortgage rate in 1991 was north of 11 per cent.
Comparatively low mortgage costs are the main reason why repossessions did not rocket during the global financial crisis. The speed with which the Bank of England cut its policy rate to close to zero prevented many people from losing their homes, despite a rise in unemployment. Thus the proportion of households in mortgage arrears remains low and actually fell, for a fourth consecutive quarter, during the first three months of this year.