One for the (housing market) bears, this.
Fresh from ratings agency Fitch, with our highlights:
Fitch Ratings-London-07 October 2009: Fitch Ratings says today that it expects the recent gains in the main UK house price indices to be a temporary respite. The agency continues to expect that UK house prices will fall approximately 30% overall from the October 2007 peak. Prices are currently 13% down from that peak, having dipped as low as 19% down in Q109.
“The UK’s average house price to income ratio remains significantly higher than the long term average,” says Brian Coulton, Head of Global Economics and EMEA Sovereigns at Fitch Ratings. “A 30% fall from the peak of October 2007 would bring this ratio back in line with the long term average. In comparison, the house price declines in the recession of the early 1990’s saw the average house price to income ratio fall below the long term trend.”
There is, as always, the thorny issue of unemployment too:
Fitch expects UK GDP to turn positive in 2010 and continue to grow into 2011, but despite this expects unemployment to increase well into 2010.
“The drag of rising unemployment and low wage inflation is yet to be significantly reflected in house prices,” says Alastair Bigley, Head of UK RMBS at Fitch Ratings. “Unemployment will peak next year and remain close to that high into 2011; this will inevitably weigh on house prices.”
What’s more — the average (employed) Briton simply can’t afford to buy a house:
Furthermore, recent easing in credit availability may also prove to be temporary as Fitch expects lending appetite to be pro-cyclical with the performance of house prices and the credit performance of the underlying borrowers. The deep interest rate cuts of late 2008 have eased affordability for a large proportion of mortgage borrowers. This has in turn led to a stabilisation in major performance indices such as 3-months plus arrears and foreclosure rates. Although Fitch expects the UK base rate to remain at its current low level of 0.5% throughout 2010, rising unemployment could trigger deterioration in these performance indices. It is likely that mortgage lenders would respond by further tightening lending criteria.
Attractively priced funding over 80% loan-to-value (LTV) remains scarce, despite the fact that some lenders have recently increased the LTV limits at which they are prepared to lend. The average UK house price is approximately GBP162,000. If mortgage availability stabilises at current LTV limits, according to data from the Nationwide Building Society this would necessitate a first time buyer having approximately GBP32,000 in cash as a deposit to buy a house. The typical pre-tax salary in the UK is approximately GBP25,000, according to the Office of National Statistics.
And even if lenders are easing some LTV limits, they are putting in place other obstacles:
Furthermore, despite the limited easing of certain lending criteria such as LTVs and pricing recently, from Fitch’s discussions with a number of large high street lenders it is apparent that the majority of lenders have introduced a number of other policy changes that mean obtaining a loan is more difficult. Most lenders have amended score card cut offs in order to increase the score needed to obtain a loan. A number of lenders are also scrutinising the source of the deposit to ensure that it does not come from other recent borrowings and some lenders are also declining loans where they see evidence of significant debt consolidation, regardless of whether the LTV and credit score are within policy.
“An appropriate loan-to-value ratio alone is not enough to secure a loan, lenders are increasingly judicious about whom they will lend to and as the effects of unemployment and possible rate rises in 2011 feed through to performance Fitch expects lenders’ risk appetite to remain reduced,” adds Bigley.
You can’t really fault Fitch on the fundamentals here though.
UK property, building castles in the sand – FT Alphaville
The sting in Nationwide’s house price survey – FT
Presenting the segmented commercial real estate crash – FT Alphaville