Britain facing a wave of repossesions, warns S&P

Britain's housing market is poised for a wave of repossessions as the Coalition Government's fiscal austerity package starts to bite, Standard & Poor's warned yesterday.

In a bleak assessment of the market's prospects, the ratings agency also said that prices are still over-valued when compared to household incomes and that the budgetary squeeze planned by the Chancellor George Osborne could "significantly test some borrowers' ability to make their mortgage payments, in our opinion" particularly if interest rates start to rise. Repossession levels have remained unusually low, not least because interest rates have remained at an all-time low for months and banks have paid heed to warnings from the Government and regulators that they must only use repossession as "a last resort".

S&P credit analyst Neil Monro said: "We note that a high percentage of nonconforming (subprime) borrowers remain in severe arrears. Therefore, possible future increases in unemployment or interest rates may cause a further wave of repossessions."

The austerity package is likely to lead to the former, with hundreds of thousands of jobs in the public sector, set to go leading to a knock-on in the private sector, with analysts fearing that the failure of the contractor Connaught could be followed by others as public sector work dries up.

S&P also said it believed that prices were fundamentally over-valued. "For example, the average house price-to-income affordability ratio for first-time buyers is still stretched at 4.3 times, relative to the long-term average of 3.3 times," the agency said. First-time buyers have found it hard to get mortgages, with 95 per cent loans all but non-existent prompting calls for government underwriting to prop up the market in some quarters.

S&P noted that signals for UK house prices have been mixed. Data from lenders such as the Halifax and Nationwide has been at odds over whether prices were rising or falling in each of the past four months. Forward-looking data from the Royal Institution of Chartered Surveyors in July suggested that the proportion of respondents expecting price falls in the next three months exceeded by 28 percentage points the proportion expecting rises.