Many lenders are taking comfort from the initial assessment that the UK market will experience a soft landing for house prices in 2008.
However, the overall picture is likely to disguise a wide variation in house price growth and transaction volumes across sectors and regions. Localised sharp falls in demand could result in house prices for certain types of property falling by around 10%.
These localised and more limited falls can translate into significantly higher levels of arrears and losses for lenders.
The importance of maintaining consumer and business confidence cannot be understated as increased price volatility is inevitable as volumes slow to much lower levels.
Lenders now have a declining appetite for risk. The credit crunch has resulted in lenders reducing their overall exposure to perceived higher risk markets. In the initial phases of the credit crisis it would seem perfectly natural for banks to retreat into assets of higher quality.
To what extent this has accelerated the slowdown in the UK housing market is difficult to gauge.
Mortgage lending is estimated to be 5-10% lower as both reduced risk appetite and credit score tightening have taken effect.
If lenders can avoid tightening asset quality further, the mortgage market is likely to stabilise quicker and get back on a long term sustainable path.