News Review: Economics
The possessions puzzle continues by
Fionnuala Earley,
UK consumer economist, Royal Bank of Scotland
Recent data from the Council of Mortgage lenders showed that both arrears and posses- sions improved in 2011 com- pared with the previous year. Arrears of more than 2.5% of the balance outstanding are running at a rate of 1.4% of mortgages outstanding, while the possession rate is 0.3%. Both are at their lowest rate since 2007, before the financial crisis and when the housing market and the economy were much more buoyant.
This is remarkable, especial-
ly given the length and severity of the recession. So how can this be happening when eco- nomic conditions are still rela- tively weak and unemployment is increasing? There are several reasons. The first is the exception-
ally low levels of interest rates. Mortgage payments are now about 30% lower than at the peak of the market in 2007. Those who took out loans at the peak of the market were likely to have been the most stretched, so the big cut in in- terest rates has taken the pres- sure off them in particular. And overall, it has allowed house- holds to continue to meet their mortgage payments in the face
of weaker income and employ- ment conditions. Meanwhile, the rate of un-
employment among the typical working age group (16-64) has increased from 5.3% in 2007 to 8.6% now. Under these condi- tions we would have expected arrears and possessions to have deteriorated significantly. In- stead, things have continued to improve.
Unemployment
has been creeping up over the last few months, but look- ing behind the figures more closely reveals a more opti- mistic picture. Looking at the age profiles, unemployment among the 35-49 and 50-64 age groups has remained at much lower levels and has been more stable. Three quarters of own-
er occupiers are in these age groups. So while unemploy- ment has been increasing and earnings have been squeezed, these age groups have suffered less. Forbearance is still a factor. A third of arrears cases have some formal arrangement, according to the FSA’s data, and the strategy seems to be working. For lenders there is little sense in taking possession when there is realistic hope that the borrowers may recover and there’s only a small chance of resale in a short period. And the extra time forbearance gives seem to be doing the trick in helping people get back on track, although this cannot go on forever.
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