The property market in October has offered homeowners a more agreeable outlook than the turmoil caused by the Northern Rock fiasco in September. However, the longer reaching effects of the ‘credit crunch’ that caused the bank’s troubles remain.

According to a report by the Council of Mortgage Lenders (CML), the wider ranging effect of the effect of the credit crunch has been to exacerbate trends that were already emerging in terms of a slowdown in the house purchase market.

The CML predicts house price growth will rise by 7% as a whole for 2007, but are only predicting a rise of 1% next year, while property sales are forecast to drop from 1.17m to just over 1m.

At the same time, total mortgage advances will edge lower to £340bn, compared with £360bn this year, although the amount lent will remain above 2005 levels.

Homes in arrears are also forecast to increase, with the number of cases who are at least three months in arrears on their home loans to reach 145,000 (1.22% of all mortgages) by the end of 2007 and 170,000 (1.42% of all mortgages) by the end of 2008.
This trend will be more pronounced than previously expected because of the funding constraints and tightening of lending criteria, resulting in reduced re-mortgaging opportunities across the lending spectrum but particularly for borrowers in the adverse credit (sub-prime) sector.
Commenting on the report, CML Director General Michael Coogan said “The housing and mortgage markets are facing their most challenging period since Labour came to power a decade ago. Luckily, the credit crunch occurred at a time when the UK economy was robust, but even so the effects on the financial sector are significant, and the mortgage market is not immune from them.

“We now expect a slower mortgage market next year, although by no means a stagnant one. Most borrowers will cope, but not everyone will escape unharmed from the effects of a slower market, so the government should make it a policy priority to overhaul the system of state support for home-owners, which has lagged pitifully behind the times."

Data released by the Bank of England showed that the number of mortgage approvals has fallen to its lowest level in over two years, giving the worst reading since June 2005.
Recent surveys have also illustrated a slowing in house price growth. The Land Registry for England and Wales reported that annual property price inflation had dropped in September to 8.7% from 9.4% in August, which they report as a "noticeable dip".

According to property website Hometrack, house prices have fallen for the first time in two years and are expected to weaken further.

Rising interest rates and weak consumer confidence has meant that buyers are taking a step back from the market, and the number of new buyers registering fell by more than 6% in October.

Richard Donnell, director of research at Hometrack, said: "The fall in prices over October is not unexpected. After several months of weaker buyer confidence, falling levels of demand and declining sales volumes, prices were bound to be affected."

Mr Donnell added: "Overall we expect the rate of house price growth to slow over the coming months with further small price falls likely in markets where achievable pricing levels are falling into line with demand.

"The last time we saw a similar fall in demand was back in 2005 but this was accompanied by a sizable increase in the supply of homes for sale. This is currently not the case and as a result we expect headline price falls to be relatively limited in the run up to Christmas and the New Year."
Nationwide’s monthly house price report focused on two factors influencing the property market.
Commenting on the recent International Monetary Fund Outlook (IMF), Nationwide’s chief economist Fionnuala Earley said “In its latest World Economic Outlook, the IMF concluded that a substantial proportion of UK house price gains over the last decade could not be entirely explained by income growth, interest rates, credit growth and the working-age population. However, this estimate of overvaluation will not account for other key drivers such as the housing supply ... As the NHPAU reminds us, the UK’s unresponsive housing supply has been instrumental in driving house prices and affordability to the current levels”

“Nonetheless, the IMF findings serve as a reminder that UK house prices have risen ahead of certain key fundamentals – particularly earnings. This finding is indisputable, but it does not mean that house prices are destined to fall. In fact, in the absence of an early 1990’s style shock to unemployment or interest rate, they are unlikely to do so.”

In relation to the buy-to-let market, Nationwide suggests that new investors entering the market may need more patience to achieve good returns. Ms Earley commented “Strong house price growth relative to rents has pushed net rental yields well below the current cost of a mortgage. This implies that without very strong capital gains, a new entrant to the market would make negative total returns in the short term until rents caught up sufficiently to cover operating and mortgage expenses.

There is now evidence that after several years of weakness, private sector rents are growing more robustly. Even so, rents would have to rise very strongly relative to house prices to make short term buy-to-let investments profitable at current interest rates” Ms Earley concluded.
The Bank of England’s Monetary Policy Committee (MPC) decision to leave interest rates unchanged at 5.75% for its October meeting was widely expected. The focus is now on whether there will be an interest rate cut before the end of the year, or whether the MPC will wait for the full impact of the disruption seen in the financial markets to unfold.

Many analysts believe that base rates will fall to around 5.25 – 5.5% over the course of the next year.