UK Housing - feeling a little uneasy?

Have you noticed a distinctly pessimistic tone in many recent articles covering the UK housing market. Here is a story from Banking Business Week. Doubts are starting to creep in. Soon, those doubts will spread and convert into a generalized fear that the market is overvalued.

Then, it will all start to unwind......

Fears of a housing market boom and bust cycle should not be dismissed lightly following its strong 2006 performance. In 2005, the mortgage market stalled alongside a slowdown in house price growth, suggesting that the market was moving towards a soft landing. However, its outstanding performance in 2006 and almost double-digit house price inflation have renewed fears of a housing crash.

Although the housing market does not appear to be on the road to a house price crash, mainly because the economy remains healthy, the threat of a boom and bust cycle is still present. A number of issues, such as high levels of personal debt, could have a considerable impact on the future performance of the mortgage market.

Slow growth expected

The UK mortgage market reached a new peak in 2006, standing at GBP344.9 billion in gross advances. This represented an increase of almost 20% over the 2005 level, which stood at GBP288.4 billion. A number of factors have assisted in driving the sector forward, including higher than expected house price inflation.

Indeed, demand in the housing market was strong over the last year, driven by a combination of factors such as city bonuses, healthy GDP growth and the British predilection for home ownership. Moreover, a tight dwelling supply has further contributed to high price inflation.

Given that supply is likely to remain tight in the near future and the economy looks relatively strong, the UK mortgage market is expected to continue growing slowly over the next five years at a CAGR of 2.6% to reach GBP357.2 billion in 2007 and GBP395.1 billion in 2011.

Rise in personal debt spells trouble

High consumer debt levels have become an increasing concern in recent years. Datamonitor estimates that average unsecured debt in the UK has grown at a CAGR of 5.4% over the last five years. At the end of 2006, an average UK adult owed GBP4,522 in unsecured personal debt, an increase of GBP852 over the GBP3,670 level in 2002.

Many households are feeling the pressure imposed by the high levels of indebtedness. As unsecured debt climbs to unprecedented levels, the pressure has started to feed through to mortgage repayments. This is stressed by data from the Council of Mortgage Lenders, which highlighted that the number of mortgaged properties being repossessed has risen from 10,310 in 2005 to 17,000 in 2006.

Moreover, the recent increases in the base rate introduced by the Bank of England to curb inflation are likely to further burden consumers, particularly those with a high level of debt. To make matters worse, there are expectations that the base rate will be increased further during 2007.