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 18 May 2008 00:12 BST

Credit crunch repossession warning issued

Monday, 28 Apr 2008 11:28
Property repossession warning sounded over credit crunch

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The number of repossessions in the UK property market could rise by 25 per cent because of the continued impact of the credit crunch.

As many as 33,400 homes are now likely to be repossessed this year, according to research from the Centre for Economics and Business Research (Cebr).

This is some 23 per cent above the level recorded for 2007, and 300 per cent above the number of repossessions in 2004.

"As the credit crunch bites people will have to spend a greater proportion of their incomes on mortgages than they have done in the recent past. This is despite the fact that the Bank of England has cut its base rate recently and further rate cuts in the future," said Nur Ata, a senior economist at Cebr.

"When affordability becomes a problem the inevitable result is a rise in the number of repossessions. However, the reasonably benign employment situation means we don’t expect repossessions to reach anything like the level seen in the early 1990s."

Cebr argues until the problems in the wholesale markets are rectified, mortgage finance will remain constrained and, even where it is available, it will be at rates which fail to reflect the recent base rate reductions by the Bank of England.

These problems lie behind both the significant increase in repossessions forecast as well as the five per cent decline house prices and 25 per cent reduction in transactions forecast.

The Bank of England has attempted to address the problems, cutting the base rate of interest to five per cent in April, and offering retail banks £50 billion in an special finance arrangement.

Repossessions also need to be placed in an historical context.

Levels are likely to remain well below the level of 75,000 per annum seen in the early 1990s, and will only account for 0.28 of all mortgages according to the Cebr forecast.

"The stark rise in repossessions forecast shows why the chancellor and the Bank of England are so keen to sort out the problems in the wholesale financial markets," explained John Ward, managing economist at Cebr.

"Unless or until this tap of mortgage finance starts to flow again, the outcome will be a reduction in house prices and an increase in repossessions," he concluded.End of story

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