Britain’s mortgage lenders have given their verdict on whether the UK is sliding into recession…

And the answer appears to be no.  Respondents to a survey by the Intermediary Mortgage Lender's Association (IMLA) believe that the UK is in slowdown mode but will avoid a full-scale recession. With GDP growth slowing to a three-year low of just 0.4% in the first quarter of 2008 (down from 0.6% in Q4 2007), some commentators have suggested the UK is heading for a recession.

However, the majority of lenders believe the economy will either continue to achieve positive growth every quarter or there will be a maximum of one quarter of falling GDP.  44% of respondents think we may see two quarters of negative growth, but none of them expects a full-blown recession over a sustained period of time.

Intermediaries agree that the mortgage market is becoming less positive, with almost eight in ten saying conditions are getting worse, although two in ten say they are unchanged.   

A handful of optimists said things are getting better. The South East’s brokers were markedly more positive about the outlook than those in other parts of the country.  There, around 22% said conditions remain unchanged, compared with only 16% in other regions.

Stable prices anticipated

The outlook from lenders and intermediaries comes on the back of forecasts that house prices that will fall by rather less than many housing market pundits have predicted.  According to the lender panel, house prices will fall by an average of 2.8% over the coming year, and as house prices fall and consumers’ finances come under greater pressure, the majority of lenders anticipate that arrears and possessions will rise slightly. 

Among intermediaries, just under half (47%) expect house prices to decline, but a surprisingly large proportion (43%) anticipate stable prices while just over 3% think prices will rise.  Again, the outlook is more favourable in the South East than in other regions, with an above average proportion of respondents (47%) expecting stability and a smaller proportion (44%) anticipating falls.

Amid the slowing economic conditions, lenders predict that interest rates will continue to ease.  The majority of respondents expect Bank of England Base Rate to be 4.75% by year end, although one thought it would be as low as 4.25%.  They also expect the spread between Base and Libor to contract to around 30 bp by end 2008 – the lowest it has been for some months.

A phase of readjustment

Peter Williams, IMLA’s executive director, says: “Times are tough in the mortgage market, but key participants in industry remain confident that we can steer clear of an all-out recession.  There are also pockets of greater optimism – surprisingly enough, in the South East, for example.”    

Peter Williams concludes: “We are in a phase of readjustment in the markets, but that doesn’t mean we’re heading for a house price collapse or a recession.  We need to see more liquidity in the money markets, and the Bank of England’s action in cutting Base Rate and in providing the £50 billion swap facility is a good start. 

“Lenders need to see an easing of the logjam in the wholesale markets, and through concerted action by the Tripartite authorities I would hope we will see an improvement in conditions and in the availability of mortgages as the year progresses.”