Levers to cut the rate of home repossessions in the UK

Research by economists Professor John Muellbauer and Dr Janine Aron, from the Institute for New Economic Thinking (INET) at the Oxford Martin School, also shows that even moderate rises in the mortgage interest rate would have pushed up the rate of repossessions and had a significant effect on the housing market.

Their model simulates the consequences of a range of economic forecast scenarios up to 2015. Drawing on both national and regional data sources, it reveals the sensitivity of mortgage repossessions and arrears to different economic conditions, and highlights the potential risks faced by UK mortgage payers, mortgage lenders and hence the government.

Dr Aron said: 'Our data suggests there would have been nearly a quarter more repossessions in 2011 if the government had not improved income support for borrowers and introduced a policy of "forbearance" which allowed borrowers more time to meet their mortgage repayments. We have shown that government policy plays a critical role in determining the level of home repossessions in the UK.'

Professor Muellbauer and Dr Aron have outlined three key drivers for repossessions: the debt service ratio, the proportion of mortgages in negative equity, and the unemployment rate. Their research suggests that forbearance policy, credit factors and access to income support also play a vital role in reducing the risks of repossession. 

As in the 1990s mortgage crisis, the recent upturn in the repossessions rate was preceded by fewer curbs on lending, a boom in debt and rising house price levels. This was later also accompanied by growing negative equity and unemployment. However, according to Aron and Muellbauer, there is a marked difference in the current financial situation as compared with that of the 1990s.

The 1990s crisis was triggered by a large rise in interest rates, and policy constraints prevented the reduction of these rates.  More recently, however, the rise in the repossessions rate was followed by the most dramatic interest rate reductions in British economic history. The researchers say that these interest rate reductions were instrumental in helping to bring down the rate of repossessions, so that at its peak home repossessions in 2008 were around half that experienced at the peak of the 1990s crisis.

Simulations of different scenarios up to 2015 suggest that slightly lower 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.

Professor Muellbauer said: '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.'

Professor Muellbauer and Dr Aron have been actively disseminating their findings to a variety of groups in order to help forecast repossessions and arrears, including government departments, and organisations concerned with mortgage lending.

A non-technical version of the paper on the regional dimension of repossessions was published in Oxford Economics Economic Outlook.