Prof Bart Lambrecht interviewed on BBC Radio 4 on state of the UK housing market
Published 28 January 2011
The latest episode (25/1/2011) of “File on 4”, on BBC Radio 4, examines the current state of the UK housing market and features an interview with Professor Bart Lambrecht, of Lancaster's Department of Accounting and Finance, about the relation between rising unemployment and mortgage default and repossession rates.
A podcast of the full programme, "Homes but no loans", can be downloaded from the File on 4 website
Defaults and repossessions
Professor Lambrecht, who studied the default and repossession wave of the late eighties and early nineties, believes that the pain of current job cuts in the public sector is likely to be unevenly spread across the country.
Job losses in areas where unemployment is low to start with may lead to little or no increase in mortgage default and repossession rates, whereas job cuts in regions with high unemployment may trigger a disproportionately high increase in defaults and repossessions.
Prof. Lambrecht argues that someone who becomes unemployed in a region with low unemployment is likely to find a new job within a reasonably short period of time, and he or she may therefore be able to keep servicing the debt from accumulated savings while being unemployed. Someone who becomes unemployed in a region with high unemployment will typically also remain unemployed for much longer, and he or she may therefore have insufficient savings to keep up with the debt repayments until a new job comes along. If a household can keep servicing a mortgage on average for, say, four months while being unemployed, then repossession rates may start going up dramatically once waiting times to find a new job start exceeding that period.
Given the variation of unemployment rates across the UK, it is therefore likely that some regions may suffer more from the current public sector cuts than others.
Economic uncertainty
New jobs in the private sector may, of course, replace some of the jobs in the public sector. However, these new jobs may be created with a lag. In the current environment of economic uncertainty and of restricted availability of financing, many firms may delay investing until economic conditions get better. As a result many households may have lost their home by the time new jobs become available.
Relocating to find a job elsewhere may not be easy. Firstly, job losses are happening simultaneously all over the country, and clearly competition for the jobs that are still available will be extremely fierce. Secondly, many households may face negative equity and a highly illiquid housing market because of the recent decline in house prices. This not only makes it impossible to “sell” your way out of financial difficulty but it also reduces the flexibility to relocate.
Academic References:
- Lambrecht, B.M., W.R.M. Perraudin and S.E. Satchell, 2003, Mortgage Default and Possession: A Competing Hazards Approach, Journal of Money, Credit and Banking 35 (3), 425-442.
- Lambrecht, B.M., W.R.M. Perraudin and S.E. Satchell, 1997, Time to Default in the UK Mortgage Market, Economic Modelling 14 (4), 485-499.
