First rise in mortgage arrears since 1998

Further evidence that the housing market is faltering emerged yesterday when the Council of Mortgage Lenders said the number of homeowners who had fallen behind with their mortgage repayments had risen for the first time since 1998.

The CML, which represents 95% of lenders, said last year's interest rate rises coupled with a small increase in unemployment was responsible for the rise in the numbers of those falling behind with their repayments. It is also predicting that the total number of borrowers in arrears will rise by almost a third over the next two years.

The figures show that in the second half of last year the number of mortgages that were three to six months in arrears increased to 53,960 - up from 49,700 in the first half of the year. In total, there were some 92,000 mortgages that were overdue by more than three months.

In 1991, at the depths of the last housing crisis, more than 80,000 homes were repossessed and 270,000 households were more than six months in mortgage arrears.

Although the CML described the current figures as "extremely low by historical standards", this is the first big increases in the numbers of those defaulting for six years and fuels speculation that the property market is hanging in the balance.

Ed Stansfield, property economist at the consultancy Capital Economics, said: "Given that interest rates were last increased in August 2004, it seems probable that this modest rise in arrears is simply the start of a rising trend."

The CML admitted that the full impact of five hikes in interest rates by the Bank of England between November 2003 and last August had yet to feed through to all households, adding that unemployment "may pick up a little".

"With short-term arrears now increasing, we are bound to see a rise in longer term arrears and repossessions following behind, although we do not expect a dramatic increase," said Michael Coogan, director general of CML.

Although repossessions are currently at a 22-year low, 6,230 houses were taken back by lenders in 2004. The CML said it expected the number of repossessions to rise by 35% this year to 8,350 - and possibly reach 11,000 in 2007.

In July last year a report by the Department of Trade and Industry said the three major factors common to those individuals getting behind in their repayments were a sudden change in personal circumstances, coupled with low incomes and high levels of debt.

In August, the total amount of British consumer debt passed the symbolic £1 trillion mark, and the same DTI report said 13% of households were failing to keep up with at least one of their repayments.

Citizens Advice Bureaux currently deal with more than a million inquiries a year from people with debt problems.

The fear is that any big rise in unemployment in the future could see the number of those in arrears and facing repossessions, return to those seen in the early 90s.

Mr Stansfield said that ar rears and repossessions had historically been a lagging indicator for the British housing market and that property prices were likely to continue falling throughout 2005.

A separate survey published yesterday by the property research company Hometrack said that house prices dropped 0.4% in January, the seventh straight month of falls.

Earlier this week, Kate Barker, a member of the Bank of England's interest rate-setting committee, said that despite recent falls, house prices were still overvalued.