UK Mortgage Market Outlook: Updated Forecasts

Mid-September 2007 has seen the most dramatic fallout so far from the US sub-prime mortgage crisis, with events at Northern Rock leading to the first 'run on a bank' in the UK in over 100 years. With less funding available, what implications will the latest developments have on the performance of the UK mortgage market?



Report Highlights
Despite the Bank of England freezing the base rate at 5.75% since July 5, 2007, inter-bank borrowing costs have continued to rise due to less available funding and higher uncertainty. The majority of UK lenders have hiked their mortgage rates, including Abbey and Bank of Scotland. Moreover, niche mortgage lenders, particularly sub-prime lenders, have raised their prices following the US sub-prime mortgage debacle. Despite expected lower lending levels in the last few months, the fact that the mortgage market delivered a record performance in the first half of 2007 will ensure that the sector reaches a new peak in 2007.


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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Funding issues are likely to impact upon the UK mortgage market going forward 2
In the UK, mortgage bank Northern Rock was hit hard by funding issues 2
Reduced funding will impact negatively upon the UK mortgage market in 2008 2
The credit squeeze has led to an increase in inter-bank borrowing costs 3
Less funding also means that lenders will have to decrease lending to certain customer segments 4
Mortgage gross lending is still set to hit a record level in 2007, despite funding issues 4
An outstanding H1 2007 will ensure that mortgage lending reaches a new peak in 2007 5
2008 will be a slow year for the UK mortgage market 7
Under the Datamonitor view, the UK mortgage market will contract to £332.2 billion in 2008 7
Given the unpredictability of the UK mortgage market, Datamonitor has analyzed two additional alternative scenarios 8
The pessimistic scenario assumes a house price crash 8
The optimistic scenario adopts a bright view of the economy 10
APPENDIX 12
Supplementary data 12
Definitions 15
Bank of England base rate 15
CAGR 15
Gross advances 15
LIBOR 15
Loan-to-value (LTV) 15
Second charge loan 15
Sub-prime 16
Methodology 16
Forecasting methodology 16
Further reading 17
Ask the analyst 18
Datamonitor consulting 18
Disclaimer 18

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Table 1: Forecasted gross advances in the UK residential market under the Datamonitor view, 2006-11f 8
Table 2: Forecasted gross advances in the UK residential market under a pessimistic view, 2006-11f 9
Table 3: Forecasted gross advances in the UK residential market under an optimistic scenario, 2006-11f 11
Table 4: Three-month LIBOR rate and Bank of England base rate, (Table 1 of 2) 12
Table 5: Three-month LIBOR rate and Bank of England base rate, (Table 2 of 2) 13
Table 6: UK monthly gross mortgage advances, 2006-07, January-June, (£m) 14
Table 7: Forecast macroeconomic variables used in Datamonitor view scenario, 2005-11f 14
Table 8: Forecast macroeconomic variables used in the pessimistic scenario, 2005-11f 14
Table 9: Forecast macroeconomic variables used in the optimistic scenario, 2005-11f 15


Figure 1: Despite a stabilized base rate, the three-month LIBOR rate has risen significantly, September 2, 2007 to September 21, 2007 3
Figure 2: UK gross mortgage lending in the first six months of 2007 outperformed 2006 levels 5
Figure 3: Datamonitor forecasts a 7% decrease in gross lending in the last four months of 2007 over 2006 levels 6
Figure 4: Under the Datamonitor view, gross lending in the UK mortgage market will contract to £332.2 billion in 2008 7
Figure 5: Under a pessimistic scenario, gross lending in the UK mortgage market will reach a low of £292.9 billion in 2008 9
Figure 6: Under the optimistic scenario, gross lending in the UK mortgage market will grow healthily to reach £425.3 billion in 2011 10

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