THE ECONOMIC & THE ECONOMIC & MARKET OUTLOOKMARKET OUTLOOK

MORTGAGE EVENT 2006MORTGAGE EVENT 2006

Martin Ellis

Chief Economist

UK Economy:UK Economy:

growth is improving …growth is improving …

H

GDP Growth

0

1

2

3

4

5

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

% C

hang

e

0

1

2

3

4

5

% C

hang

e

% quarter on quarter % year on year

Source: ONS and Datastream

UK Economy:UK Economy:

inflation & interest rates are edging up …inflation & interest rates are edging up …

H

Inflation and Interest Rates

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2000 2001 2002 2003 2004 2005 2006

%

CPI Annual % Change Bank of England Official Lending Rate

Source: Bank of England and ONS

UK Economy:UK Economy:

prospects …prospects …

• Growth to be around long-term average over next 12 months.

• More balanced growth – less dependent on the consumer.

• Interest rates to rise but not dramatically.

H

Household Finances:Household Finances:debt : income ratiodebt : income ratiostill rising …still rising …

H

Debt: Income

70

80

90

100

110

120

130

140

150

160

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

% o

f Ann

ual D

ispo

sabl

e In

com

e

Source ONS and Bank of England

Household Finances: Household Finances:

income gearing below early 90s levels …income gearing below early 90s levels …

H

Income Gearing

0

5

10

15

20

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Repaym

ents

as %

of D

isposable

Incom

e

Interest and mortgage repayments Interest only

Sources: ONS and Bank of England

Household Finances:Household Finances:

wealth rising more quickly than debt …wealth rising more quickly than debt …

H

£ Billion

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Wealth Debt

Source: ONS and Bank of England

Household Finances: Household Finances:

mortgage arrears remain low …mortgage arrears remain low …

H

UK lenders' arrears on domestic mortgage lending

0.0

0.5

1.0

1.5

2.0

2.5

88 H

1

89 H

1

90 H

1

91 H

1

92 H

1

93 H

1

94 H

1

95 H

1

96 H

1

97 H

1

98 H

1

99 H

1

00 H

1

01 H

1

02 H

1

03 H

1

04 H

1

05 H

1

06 H

1

%

6 - 12 months in arrears More than 12 months in arrears

Source: CML

Household Finances:Household Finances:

overview …overview …

• Employment levels are high.

• Strong household sector balance sheet.

• Homebuyers are putting down bigger deposits than in previous cycles.

• Arrears and repossessions remain low.

The UK housing market:The UK housing market:

house price inflation is moderating …house price inflation is moderating …

House Prices

-15-10-505

10152025303540

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Annual %

Change

Source: Halifax Plc

H

The UK housing market: The UK housing market:

turnover has recovered …turnover has recovered …

H

Housing Transactions

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

95 96 97 98 99 00 01 02 03 04 05 06

Num

ber

Source: Land Registry

The UK housing market : The UK housing market :

supply shortages …supply shortages …

H

Ratio of sales to unsold stock

0

10

20

30

40

50

60

70

80

90

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Source: RICS

The UK housing market:The UK housing market:

north/south divide widening again?north/south divide widening again?

H

North/South Divide

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

83 85 87 89 91 93 95 97 99 01 03 05

Ratio

Source: Halifax

UK housing market prospects:UK housing market prospects:

strong fundamentals …strong fundamentals …

H

Employment and Unemployment

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

Em

plo

ym

ent R

ate

(000's

)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Cla

imant C

ount (0

00's

)

Employment Level Claimant Count

Source: ONS

UK housing market prospects:UK housing market prospects:

but constraints exist …but constraints exist …

• Pressure on households’ discretionary income from substantial utility bill rises and above inflation council tax increases.

• Speculation of interest rate rises and recent upward movement in variable and fixed rate mortgage pricing.

• High house prices in relation to earnings.

H

Mortgage Market: Mortgage Market:

pick-up in house purchase loans …pick-up in house purchase loans …

H

House Purchase and Remortgages

0

50

100

150

200

250

300

350

400

450

98 99 00 01 02 03 04 05 06

Num

ber

(000's

)

Loans for House Purchase Remortgages

Source: Bank of England

Mortgage Market: Mortgage Market:

fixed rate lending remains high …fixed rate lending remains high …

H

Fixed and Variable Rates

0

10

20

30

40

50

60

70

80

90

Jun-02 Jun-03 Jun-04 Jun-05 Jun-06

% o

f fix

ed a

nd v

ariable

rate

s

Fixed Rate Variable Rate

Source: CML and Bank of England

Mortgage Market: Mortgage Market:

but fixed rates are less attractive …but fixed rates are less attractive …

H

Fixed and Variable Rates

3.03.5

4.04.5

5.05.5

6.06.5

7.07.5

Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06

%

2 year fixed rate 95% LTV Variable Rate 95% LTV

Source: Bank of England

ConclusionsConclusions

• Economy back to long-term historical average and in good health.

• Interest rates rising but not dramatically.

• Income shocks that caused difficulties in early 1990s not to be repeated so downside risks highly unlikely to materialise.

• Stable housing market.

H