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 1Q09.
"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."
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."
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.
"Despite the fact that a global economic recovery is underway, the economic fundamentals do not auger well for a sustained strong recovery in the UK housing market. Although households are reducing debt and increasing savings, the upfront cost of house purchase for first time buyers is likely to stifle housing demand," says Bigley.