A change in the interest rate could dramatically increase the number of house repossessions, according to Oxford Martin School academics. Their comprehensive economic model also implies that the rate of repossession in 2011 would have been at least 23% higher if government had not engaged in policy actions to protect mortgage payers in difficulties.
Professor John Muellbauer and Dr Janine Aron have been able to demonstrate that even moderate rises in the mortgage interest rate can have an important impact on the housing market, considerably increasing the number of repossessions. Their forecasting model is now being used by government departments, and has influenced government policy regarding mortgage holders who are in arrears with their payments. It has also influenced modelling work at at least one major UK bank and at the Bank of England.
The model, which simulates the consequences of a range of economic forecast scenarios up to 2015, has been developed by Professor John Muellbauer and Dr Janine Aron of INET @ Oxford Martin School. Drawing on both national and regional data sources, it reveals the sensitivity of mortgage repossessions and arrears to different economic conditions, highlighting the potential risks faced by the UK and its mortgage lenders.
Two reports arising from an analysis of the data from these models have influenced the present government’s decision to extend policy measures to assist mortgage-holders who were in arrears. “Our data showed there would have been at least 23% more repossessions in 2011 if the government had not introduced forbearance and income support to restrain the extent of rising possessions,” Aron explains. “One of the conclusions from our report suggests the critical role of government policy for homeowners and mortgage lenders.”
Muellbauer and Aron have shown that repossessions are driven by three key variables, the debt service ratio, the proportion of mortgages in negative equity and, the unemployment rate. Forbearance policy, credit factors and access to income support also play a vital role.
As in the 1990s mortgage crisis, the recent upturn in the repossessions rate was precededby lower lending quality and a boom in debt and house price levels, and was accompanied by growing negative equity and unemployment. However, according to Aron and Muellbauer, there is a stark difference. The 1990s crisis was triggered by a large rise in interest rates, and policy constraints prevented the reduction of these rates. The recent rise in the repossessions rate was followed by the most dramatic interest rate reductions in British economic history. The lower interest rates and other policy interventions caused the UK repossessions rate to peak at the end of 2008, at around half the peak experienced in the 1990s crisis.
Simulations of different scenarios up to 2015 suggest that softer house prices in 2011, combined with some withdrawal of income support, would be likely to lead to a small upturn in repossession orders in most regions. However, the most serious potential cause of rising repossession rates would be some return of mortgage interest rates to more ‘normal levels’. Much then hinges on when this is likely to occur and by how much.
Muellbauer and Aron have been actively disseminating their findings to a variety of groups in order to help forecast repossessions and arrears. Said Muellbauer, “Our models are being used by the Department for Communities and Local Government for their own use in forecasting, and our work has been shared with the Ministry of Justice, the Financial Services Authority and the Council of Mortgage Lenders. I have also discussed this work in business fora, including at a one-day conference at Lloyds Bank Group. The work has been taken up by the IMF Stress Testing Unit and the Financial Stability Unit of the Bank of England and a non-technical version of the paper on the regional dimension of repossessions was published in Oxford Economics Economic Outlook circulated to a business and policy audience.”
- Read related reports: Modelling and forecasting with county court data: regional mortgage possession claims and orders in England and Wales
Modelling and forecasting UK mortgage arrears and possessions (NHPAU): Report, 2010
Read more about John Muellbauer and Janine Aron’s work at INET
- Read more on this story on the University of Oxford website
Photo Houses for sale via Wikimedia Commons