UK recovery cuts home repossessions, but some see trouble brewing

LONDON Thu Nov 14, 2013 9:34am EST

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LONDON Nov 14 (Reuters) - Britain's economic recovery has helped cut home repossessions to their lowest level in at least five years, data showed on Thursday, but the rebound could come back to bite homeowners if it pushes interest rates up sooner than expected.

Between June and September 7,200 homes were repossessed - 400 fewer than in the previous quarter and down 12 percent versus the same period in 2012, data from the Council of Mortgage Lenders (CML) showed. The repossession rate fell to 0.06 percent, the lowest since the CML began collecting data in 2008.

"As the economic recovery gains momentum and unemployment declines, arrears and possessions will fall further," Capital Economics economist Matthew Pointon said. "But the real test will come when interest rates do eventually rise."

Britain's housing market has staged a recovery this year, helped by government schemes to encourage mortgage lending.

But economists and industry specialists are wary that if wages remain stagnant, homeowners could struggle when the Bank of England needs to curb inflation by raising interest rates from their current record low of 0.5 percent.

"The Bank rate, and interest rates with it, will eventually be hiked up - and sooner than predicted if the faster-than-expected fall in unemployment continues," said Richard Sexton, director of e.surv chartered surveyors.

"A rise in interest rates could potentially push more homeowners - and particularly first-time buyers - into the red."

On Wednesday, the BoE slashed its forecasts for the unemployment rate, an indicator it has put at the heart of decisions over future interest rate moves, but Governor Mark Carney stressed he was not about to act.

Nevertheless, financial market prices show that traders still expect the central bank will need to hike rates in early 2015 - sooner than the bank originally forecast.

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