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  • 13/11/2001
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In the wake of the recent terrorist attacks in the US, what effects will the changes in the world economy have on the UK mortgage market?

Q. What are the latest figures for mortgage sales and can they tell us anything about what may happen in the near future?

The latest figures from the Council of Mortgage Lenders (CML) show that during September, mortgage lending fell by 13% (a figure based on mortgage completions from banks and building societies). However, because these figures are based on completions they do not accurately reflect the potential impact on the market that the incidents on 11 September may have had. September is usually one of the quieter periods in the mortgage market calendar and as such it is expected to see an element of slowdown.

Although lending did fall it still remains higher than for the same period last year. In September, the value of remortgage business remained at £4.4bn, but increased as a proportion of total lending to 31%. The average amount borrowed decreased for both first time buyers who made up 40% of total loans and former owner occupiers who accounted for 60%.

Over the next two to three months we are likely to see the first demonstrable effects on the mortgage market due to the recent terrorist attacks. How severe or otherwise they are is currently difficult to measure. Many lenders have already reported a decline in the number of mortgage enquiries, but the reason for this may be more to do with a wait and see mentality on behalf of the borrowers as they in turn assess the implications.

Q. What is the Bank of England’s prognosis for the economy?

The most recent rate cut took place on 4 October when the bank base rate was reduced to 4.5% ‘ this was after the interim rate cut of 0.25% on 18 September. The Bank of England said consumption and domestic demand in the first half of the year had been growing faster than previously thought.

It believed that early indications showed that the direct impact on the UK economy would be less severe than in the US. However, the weaker global outlook had set back UK business and consumer confidence and could restrain business and household spending. It was therefore felt that a further reduction in interest rates would be beneficial in order to meet the inflation target.

Q. Can the Bank of England’s view be substantiated by other organisations?

The Confederation of British Industry’s (CBI) director general, Digby Jones, reiterated his confidence in the economy in a recent speech.

‘The mood in the business community is anxious rather than gloomy. So far consumers seem willing to spend, thereby helping to stave off a recession,’ he said.

Figures were then released that substantiated this claim with retail sales volumes growing at their fastest pace for five years in September. The underlying trend, shown by a three-month moving average, has also risen, confirming consumers’ willingness to spend. The CBI also welcomed the move on 4 October to cut rates.

Ernst & Young has also published its latest quarterly ITEM Report for autumn 2001. The economic forecasting group predicts that household earnings and employment will slow as a result of declining profitability and in turn this will herald a decline in consumption. It describes the housing market as firmš with competition in the personal loan market allowing people to carry an increasing amount of debt. It predicts that the UK’s GDP growth is only likely to decrease by half a point next year.

The group also believes that world economies could face the risk of policy overkillš with too many policy decisions being made without a full quarter of financial information being available.

Q. What positive factors could influence the mortgage market over the next few months?

With remortgaging growing as a percentage of the lending figures, it is quite possible that this will continue. While redundancies and changes in the job market may put many off moving, those who feel more secure may look to remortgage as a means of releasing capital.

If prices do drop or stabilise as a result of the changes in the economy, it may also increase the number of first time buyers. These may be individuals who are keen to get a foot on the property ladder, but due to the continued growth in prices, have been unable to do so. As they have no property to sell they will see the benefits of buying while prices are low. If this does happen it is difficult to predict the impact it will have on the rental market as it starts to lose its potential source of tenants.

It is difficult to accurately predict the changes that are likely to occur over the next few months. It will be important that brokers focus their energy on keeping up-to-date with changes in their region and be in a position to give clients best advice.

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