Jeff Salway: Lull in repossessions could be calm before the storm if rates rise

Published on Friday 13 November 2009 19:43

TEMPTING as it is to view the latest repossession figures as a sign that the storm has passed, it is more likely that we are in the eye of a storm with plenty of damage yet to be done.

The Council of Mortgage Lenders (CML) has revised its repossessions forecast for this year, down by 27,000 from its prediction at the outset of the year to 48,000. The revised figure makes sense, reflecting lower repossession numbers in the last six months and a reduction in the number of homeowners in arrears. It pointed out that lender forbearance – certainly a factor but far from universal – and low interest rates had eased the pressure on homeowners, while government initiatives, such as the Homeowners Support Fund, have enjoyed varying degrees of success.

However, the CML also forecasts just a small rise in arrears and repossessions next year, which is perhaps dangerous. For one, it underplays the impact of any interest rate increases. Some experts believe interest rates will remain unchanged over the next 12 months, but it will only take a small increase, of which there is a strong chance, to tip some homeowners over the edge. Similarly, it may take just a small base rate change for lenders to implement disproportionate repayment interest rate increases.

To underplay the impact of continued high unemployment levels would also be unwise. While the labour market outlook appears to be brightening, the lag between homeowners being made redundant and falling behind on mortgage payments can be significant, particularly when interest rates are low. And how will lenders respond to any house price increases? It could be argued that while values are depressed, there's less incentive for them to repossess properties. When they rise, the converse may apply.

In other words, lower than expected repossession numbers are not an excuse to take the eye off the ball. Shelter Scotland last week highlighted statistics showing a 20 per cent rise in mortgage actions taken to court in the 2008-9 year and a 50 per cent increase in decrees granted.

Co-ordinated action between the government and bodies including the CML has enabled families to stay in their homes when they would previously have been kicked out. Still more is needed, however. Shelter Scotland has warned that "another wave of repossessions may be on the horizon next year" and it is right to warn against complacency.

THE mood among investors remains relatively downbeat, but the pessimistic consensus was given a jolt last week when Warren Buffett's Berkshire Hathaway bought the Burlington Northern railroad for $44 billion, its biggest deal to date.

The instinctive response was that the doom-mongers had been wrong-footed, again, by the Sage of Omaha. Surely this deal, described by Buffett as an "all-ways bet for America", is a massive vote of confidence in the US and global economy?

But across the pond, many experts remain unconvinced. They point to Buffett's admission that he would be "be more worried holding cash", which suggests the deal is primarily a hedge against inflation in the event of the US dollar falling further.

So what is it? Has the pendulum now swung back in favour of optimism, with the world's greatest investor betting a fortune on a rapid expansion of the US economy? Or is that reading too much into a what may just be a safe long-term play on a sector in which demand is expected to grow only gradually over the longer term?