Economic outlook and mortgage market implications Little recovery in sight Martin Gahbauer Senior Economist
Dec 28, 2015
Economic outlook and mortgage market
implications
Little recovery in sight
Martin Gahbauer
Senior Economist
Outline
• 3 negative shocks to mortgage transactions
1. “Credit crunch”
2. Economic downturn
3. House price expectations
• Future prospects for activity
Shock #1: Credit Crunch
2007 Flow of funds (£bn)
0
20
40
60
80
100
120
140 Net mortgage and consumer creditChange in deposit balances
RMBS, covered bonds, etc.
Shock #1: Credit Crunch
Likely Flow of Funds in 2008
-40
-20
0
20
4060
80
100
120
140
Retail depositgrowth
Maturing RMBS Funds availablefor lending
2007 lending tohouseholds
Source: Nationwide calculations
Credit crunch impact on lending criteria
Expected change in credit scoring criteria (net balance)
-50
-40
-30
-20
-10
0
10
Dec-07 Mar-08 Jun-08Source: BoE Credit Conditions Survey.
Shock #2: Economic downturn
• Economic output likely to fall over next year
• Domestic demand to be hit hardest
• Noticeable recovery not likely before 2010
GDP Fan Chart - Aug Inflation Report
ONS Data
-2
-1
0
1
2
3
4
5
6
2003q1 2004q3 2006q1 2007q3 2009q1 2010q3Source: Bank of England
-2
-1
0
1
2
3
4
5
6
Shock #2: Economic downturn
Sterling Oil Price
£40
£45
£50
£55
£60
£65
£70
£75
1/ 1/ 08 2/ 12/ 08 3/ 25/ 08 5/ 6/ 08 6/ 17/ 08 7/ 29/ 08 9/ 9/ 08
Source: Reuters
Shock #2: Economic downturn
Real post-tax income per household
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08
Source: ONS, DCLG
Mortgage Affordability
Initial Affordability of Mortgages
10%
20%
30%
40%
50%
60%
1984 Q1 1987 Q1 1990 Q1 1993 Q1 1996 Q1 1999 Q1 2002 Q1 2005 Q1 2008 Q1Source: Nationwide
FTB mortgage cost as % oftake-home pay
Long-run average
• Falling real incomes are a problem …
• … especially since affordability metrics were stretched to begin with
Labour market beginning to buckle
Claimant count monthly change
-20
-10
0
10
20
30
40
Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08Source: ONS
• Unemployment rate likely to rise appreciably
• Most job losses so far in construction, manufacturing and hotel/restaurant sectors
Shock #3: House price expectations
House price inflation (% yoy)
-15
-10
-5
0
5
10
15
20
25
30
35
Aug
-91
Aug
-92
Aug
-93
Aug
-94
Aug
-95
Aug
-96
Aug
-97
Aug
-98
Aug
-99
Aug
-00
Aug
-01
Aug
-02
Aug
-03
Aug
-04
Aug
-05
Aug
-06
Aug
-07
Aug
-08
Source: Nationwide, Halifax
Nationwide Halifax
Shock #3: House price expectations
Consumer expectations for 6 mth house price inflation (%)
-5
-4
-3
-2
-1
0
1
2
3
4
5
Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08
Source: Nationwide Consumer Confidence Survey
Big impact of shocks on lending volumes
Mortgage approvals for house purchase ('000s)
0
20
40
60
80
100
120
140
Apr-93 Apr-96 Apr-99 Apr-02 Apr-05 Apr-08
Source: Bank of England
0
5
10
15
20
25
30
35Total Specialist
Impact of shocks on lending volumes II
Remortgage Approvals ('000s)
60
70
80
90
100
110
120
J ul-05 J an-06 J ul-06 J an-07 J ul-07 J an-08 J ul-08Source: Bank of England
Reasons to be cheerful: Inflation now peaking …
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10
Headline inflation Core Inflation
… and base rate likely to fall sharply
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09
Base rate 2-yr Swap
Market will eventually recover
• Valuations will adjust to more affordable level
• Rental yields likely to rise well above “risk-free” rate of return
• US rescue plan may boost investor confidence
• Economy and employment outlook should improve by 2010
• Low activity has been leading to build-up of pent-up demand
Demographic projections still favourable
Demographic Projections
-400
-300
-200
-100
0
100
200
300
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Source: Government Actuary's Department
15-24 yrs old 25-34 yrs old Total FTB cohorts
Specific market dynamics
• House purchase:
Activity should already be in a bottoming out process, albeit at extremely low levels
Expect FTB activity to recover somewhat in 2009
• Re-mortgage:
Deal maturity pipeline to slow in 2009
Some borrowers may not meet criteria
But rate cuts should lead to more attractive deals
Conclusions
• Near-term outlook for transaction volumes remains very difficult
• Adjustment takes time to work through system …
• … but a cyclical recovery will eventually arrive