Faith in rising house prices may only increase debt woe

IN RECENT years, investing in property has often been seen as a good way to get rich quick. The perceived wisdom was that anyone can make money from property and that prices will never fall. The reality is that prices have been falling and, in the foreseeable future, are predicted to, at best, remain static.

Yet this week mortgage lending rose by 9 per cent on the previous month, and the Council of Mortgage Lenders (CML) said: "The doom-mongers' prophecies look to have been wrong." But they would say that, wouldn't they? After all, it is in the interests of mortgage lenders to say that nothing is wrong, it is in the interest of banks, solicitors, estate agents and, dare I say it, mediums which accept house advertising, to say that everything is fine and business is booming.

But examining the CML's data reveals a different story. Year-on-year figures show that mortgage lending rose by 3.7 per cent, but the more telling statistic is that lending for house purchase actually fell year on year. Remortgaging and further advances on existing loans accounted for 51 per cent of the 27.5 billion advanced, which implies a more static housing market and less likelihood of rising prices.

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The CML's own predictions for the housing market show house price year-on-year growth to be -2 per cent in 2005, 0 per cent in 2006 and 2 per cent in 2007, down from its previous predictions of growth of 4 per cent, 2 per cent and 2 per cent for the period 2005-7.

It forecasts arrears in excess of three months to rise from 92,090 in 2004, to 115,000 in 2005, 125,000 in 2006 and 130,000 in 2007. It is also forecasting a near doubling of repossessions from the 2004 figure of 6,230 to 12,000 by 2007.

There are signs that consumers are spending less, with the drop in credit card indebtedness. This is good news as the recent spending boom based on credit and equity built up in property was always going to be unsustainable.

But the main concern is that it is often two to three years after housing booms that the serious problems arise. The last major housing peak was in the late 1980s, but the rate of repossession did not peak until the second half of 1991, when 38,730 homes were repossessed.

While there are no clear signs yet that negative equity and repossessions will rise to early-1990s levels, there are worrying signs people are more than ever financially exposed through other sources of credit.

There is also a perception that remortgaging somehow resolves indebtedness. Remortgaging is a means of postponing full payment, but not a way in which debt is cleared. Putting off the inevitable does not stop it being inevitable and reality will filter through.

It remains to be seen whether the strategy of the CML and others to constantly put a positive gloss on the housing situation is the right idea or simply helping to fuel future debt problems among individuals.

Matt Henderson is a recovery and reorganisation partner with Grant Thornton.

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