by Ian McConnell© The Herald
Originally published: 30.10.2007

UK house prices will fall overall in real terms next year for the first time since 1994 and repossessions will jump by 50% but Scotland will escape the worst , the Council of Mortgage Lenders (CML) predicted yesterday.

Figures yesterday from the Bank of England meanwhile revealed fresh mortgages approved for house purchase in the UK plummeted in September to their weakest monthly level since July 2005 - also signalling tougher times ahead for what has been a red-hot residential property market.

The CML has slashed its prediction of nominal UK house price growth next year from the 5% which it forecast back in December 2006 to just 1% - a rise which would almost certainly be outstripped by consumer price inflation. Benchmark annual consumer prices index inflation stood at 1.8% in September, having been as high as 3.1% in March.

The CML's forecast would, if realised, represent the first fall in UK house prices in real terms in any calendar year since 1994, on the basis of the historical numbers from HBOS subsidiary Halifax's authoritative house price survey.

However, it would not be as bad as 1994 even if the CML forecast were to come to pass. Halifax, the UK's largest mortgage lender, calculated that the average UK house price fell by 1.5% on a nominal basis in 2004. With retail price inflation at 2.4%, the fall in real terms was 3.9%.

A spokesman for HBOS signalled last night that, while the bank expects UK house price growth to slow next year from the 7% level expected in 2007, it did not anticipate an outright fall even in real terms.

Both HBOS and the CML's policy consultant in Scotland, Kennedy Foster, forecast the housing market would be stronger in Scotland than in the UK as a whole next year.

Asked about the CML's forecast of a 1% nominal rise in the average UK house price next year, and the implication of a real-terms fall when consumer price inflation is taken into account, Foster said: "I would probably see Scotland being slightly stronger than the (UK-wide) figures.

"I think, basically, a lot down south can be affected by the performance of London and the south-east (of England). Generally, up until (now), the Scottish market, in terms of stability, has probably been more stable. There still seems to be (strong) demand in particular areas, such as Edinburgh and bits of Glasgow as well."

The HBOS spokesman said: "UK house price growth will continue to slow in 2008 but we don't expect an overall fall in prices. Because houses are more affordable in Scotland than in England and Wales, we would anticipate the slowing of growth will be less felt in Scotland than in England and Wales."

HBOS is not due to publish its definitive 2008 housing market forecasts until December.

The CML is sticking with its expectation of 7% growth in UK house prices in 2007 as a whole. It is also predicting a 50% surge in repossessions, from 30,000 in 2007 to 45,000, or 0.38% of all mortgages next year.

Construction company Kier Group added to the gloom yesterday by highlighting "negative buyer sentiment and uncertainties in the mortgage lending market", following the run on UK mortgage bank Northern Rock which arose from the global credit market turmoil.

It emerged on September 13 that Northern Rock had had to turn to the Bank of England as lender of last resort after the credit crunch made it impossible for it to raise funding in wholesale markets in the normal manner.

The Bank of England said yesterday that the number of new loans approved for house purchase, as opposed to remortgaging or equity withdrawal, tumbled from 108,000 in August to 102,000 last month on a seasonally-adjusted basis.

As well as being the lowest monthly total since summer 2005, the September figure was also way adrift of the total of 114,000 seen as recently as July this year.

Yesterday's approval numbers from the Bank add to a growing body of evidence signalling that the global credit market crisis, which has its roots in massive default on home loans by those American households with poorer credit ratings served by the sub-prime mortgage sector, is now dampening the UK housing market.

UK mortgage lenders have raised their lending rates across the board amid the financial market turmoil and cut the range of home-loans they offer in recent weeks, amid tighter money market conditions. Sub-prime borrowers are expected to face a particular tightening of lending rates and conditions.

However, yesterday's latest signs of a more difficult period ahead for the UK housing market are unlikely to be sufficient to persuade the Bank of England's Monetary Policy Committee to cut base rates when it makes its next decision on November 8.

Overall UK economic growth remains strong, and yesterday's lending numbers from the Bank of England also showed a surprisingly large £1.4bn net jump in consumer credit in September. This rise in unsecured lending was the biggest monthly increase since January 2006, and signals that consumers have not lost their appetite to borrow. The credit-card component of unsecured lending rose by a net £310m in September - the strongest monthly advance since February 2006.

In any case, the MPC had been looking for the UK housing market to cool. MPC member Kate Barker only last week highlighted her view that the global credit market turmoil would not be sufficient to stop UK house prices continuing to rise.

The MPC took UK base rates to 5.75% on July 5 - with its fifth quarter-point rise since August last year. While the Bank of England and European Central Bank have stood pat on UK and eurozone interest rates, the US Federal Reserve has taken action to bolster the world's largest economy.

The US central bank on September 18 cut its benchmark Fed funds rate by a half-point to 4.75%. It is expected to cut it by a further quarter-point when it finishes its latest meeting tomorrow.