Transaction levels stay muted in 'abnormal' conditions

Transaction levels continue to stay on the floor, the latest mortgage figures have revealed, with what Nationwide yesterday called ‘abnormally low’ levels of stock for sale driving prices up.

The lender said prices rose again in June for the third time in four months, going up by 0.9% in June after a 1.3% rise in May. It said house prices were up 1.1% over the three months to the end of June but 9.3% lower than this time a year ago.

Nationwide’s chief economist, Martin Gahbauer, said that the fact house prices had continued to rise represented more than statistical noise, but warned of the possibility of a relapse.

He said the abnormally low supply levels are unlikely to last as more sellers are encouraged on to the market by rising prices while others become forced sellers through unemployment.

He added: “The recovery in housing demand could therefore easily stall if and when interest rates begin to rise again.”

Meanwhile, the Bank of England says the number of mortgage approvals for new house purchases in May was 43,414 – barely up from April’s 43,191. The May figure was weaker than forecasters had predicted, suggesting that the housing market is being talked up.

The news follows that from the Building Societies Association, which said gross mortgage lending by its members was £1.5bn in May 2009, down from £3.53 billion in May 2008.

But while lenders remain reluctant to lend – with many under fire for raising their rates –  they are also being softer on mortgage arrears.

Credit ratings agency Fitch Ratings says it is now taking three months longer for possession proceedings to complete, compared with 12 months ago.

It says that repossession is now taking 12 to 15 months, and that proceedings are now usually started after three or four missed payments. Before 2008, lenders tended to act after two missed payments.

However, Fitch is warning about re-default rates – where householders who have defaulted once, have their loans modified and then miss further payments.

Fitch says that 70% of US mortgage holders who default once, go on to default again. The same thing might happen in the UK, it says.

It warns that a softer approach by lenders might backfire, because it could be “delaying the inevitability of possession by agreeing to a loan modification that is unrealistic”. It cautions that if house prices continue to fall, re-defaulting home owners could have yet more added to their long-term debt.

In the US, home owners can walk away from their debts after repossession, but in the UK lenders can and do pursue borrowers for any difference between what they owed on their mortgage and the amount the property fetched.