The Royal Institute of Chartered Surveyors (RICS) has said that the volume of home sales could fall by 40% because of the credit crunch.

In an analysis of the housing market, RICS also said that house prices may fall by 5%, however, no crash is expected, with the most probable outcome being a period of ‘below trend activity’.

Cost of Mortgages
RICS also found that while the impression of rising mortgage costs is popular, the reality is more mixed. For some borrowers, this impression is true, however for others the cost of money has gotten cheaper. However, it is those looking for large mortgages, namely first time buyers who are under pressure. RICS said that on a typical 95% loan to value ratio, where it is still available, the cost of a mortgage has edged up on two year fixes from 6.3% to almost 7% since July. On five year products, the average mortgage rate has also moved higher albeit to a lesser extent.

But, there are still shocks ahead. Many who refinanced on 5-year deals are yet to feel an increase in repayments, however RICS believes that this ‘mortgage shock’ for those on two year deals has now passed.

Forced Sales
With the credit crunch impacting house prices, there were fears that the number of forced sales would increase. This doesn’t appear to be the case yet, with RICS finding new instructions to sell actually falling in 10 out of the past 11 months. However, RICS is cautious on this figure and won’t rule out the possible impact of forced sales in the coming months.

Repossessions are likely to increase however. Recent data from the Ministry of Justice on repossession actions show that lenders are willing to instigate legal proceedings when people fall behind on their mortgages. In Q1 2008, mortgage possession claims were the highest since 1992 Q1. But the fact that court actions are hitting early 1990s highs does not mean that repossessions will also do so. Lenders have become more willing to instigate legal proceedings in recent years, leading to a higher proportion of those households who are in arrears finding themselves in the early stages of repossession. Many are, however, able to negotiate their way out of the problems and hence the increase in actual repossessions should not be as dramatic. Nevertheless, RICS analysis points to an increase in repossessions to around 43,000 this year. Put in context, this would represent under 0.4% of all mortgages. By way of comparison, repossessions hit a high in the early nineties of 77,000, representing 0.77% of all loans.

Looking Ahead
In forecasting the housing market RICS said: “Previously we were looking for the housing market to gain some renewed traction during the latter part of this year but the ongoing re-pricing of risk by lenders make such an outcome now appear somewhat improbable. Our best guess is that prices will continue to gently ease back during the remainder of 2008 which will leave the DCLG index around 5% lower in the final quarter of the year compared with the equivalent period of 2007.

We would however acknowledge that the risks surrounding our forecast are rather greater than has typically been the case. On the upside, the imbalance between the demand and supply could help provide a floor under prices particularly if the credit crunch shows some signs of thawing in response to central bank initiatives.

Looking into 2009, we are candid enough to recognise that any projections need an even greater health warning attached. That said, our central scenario envisages a little further weakness in the early part of the year being subsequently reversed as market conditions begin to improve.”