Jeff Salway: Shades of the 1990s as repossession timebomb ticks

AS THE UK economy teeters on the edge of a double-dip recession, the government's nostalgic desire to relive the nineties threatens to extend to a new surge in repossessions.

Repossessions could reach 175,000 within two years, given the worst case scenario of a quick rise in interest rates and unemployment going as high as 11.4 per cent next year, according to an Oxford University report published last week but commissioned by the Labour government last year. The 175,000 figure is likely to prove excessively pessimistic, but the report reinforced the growing impression of a storm brewing that could have a dramatic impact on repossession levels.

The Council of Mortgage Lenders forecasts 53,000 repossessions this year, up from 47,700 last year and double the amount just three years ago, though short of the 1991 peak of 75,500. Its original fears of repossessions exceeding 75,000 last year were not realised due to a combination of lender forbearance, low interest rates and the impact of government support. But while interest rates will remain low for at least another year, that may be all that prevents a repossessions crisis echoing the dark days of 1991.

Rising unemployment; a squeeze on household incomes; regressive housing policies; a change in lender attitudes towards arrears; a reduction in government aid for those facing repossession; and a renewed lending drought that could trigger a fresh property slump. Collectively this amounts to a repossessions timebomb, and even in the best case scenario some of these factors seem certain to pull the rug out from under thousands of households already struggling to maintain their repayments.

There is little doubt that the previous government's work with the Council of Mortgage Lenders helped encourage lenders to exercise greater forbearance than previously (along with the realisation that it was cheaper in most cases to keep people in their home than to repossess). However, the new government appears complacent regarding the prospects of a surge in repossessions.

Of managing repossession levels Grant Shapps, the housing minister, has stated: "This will be achieved by tackling the 155 billion deficit which will help enable homeowners to stay in their own homes and avoid repossession through ongoing lower interest rates," - completely disregarding the fact that repossessions have risen even while rates have been at an all-time low.

One of several flaws in relying on low interest rates to keep the situation in check is that they are not the only reason the worst fears have not yet been realised. Low interest rates have enabled millions of homeowners on standard variable rates and trackers to keep on top of their finances, but many borrowers are stuck on repayment rates some 4, 5 and 6 per cent above the base rate.

While the cost of the best mortgages for those with at least 25 per cent equity in their homes is gradually falling, those without that amount of equity and seeking to remortgage over the coming months may struggle to secure a decent deal. With the government yet to commit to further support for the mortgage market to bridge the estimated 300bn funding gap faced by lenders, costs seem certain to rise again as lenders squeeze borrowers without squeaky clean credit records and large deposits or equity.

That's before the implications of higher unemployment kick in. How much longer will lenders remain patient if low wage inflation and rising jobless figures prevent borrowers with suspended possession orders hanging over them from clearing their arrears? The Consumer Credit Counselling Service believes many homeowners so far given a reprieve may soon find lenders running out of patience. Similarly, the many borrowers who took out massive mortgages in the mid noughties in the confidence that the value of their home would only rise were recently warned by PricewaterhouseCoopers that there's a 50 per cent chance their property could be worth less in a decade's time that it was in 2007. For them, getting the kind of mortgage deal that keeps the wolf from the door may soon be impossible, if it isn't already.

The government is creating the conditions for unprecedented levels of repossessions and its reluctance to acknowledge the potentially disastrous implications for thousands of households across the UK is politically and morally alarming.