Housing activity and prices slightly better than expected
• December saw falls in all of the main selling price indices, although the pace of decline has reduced slightly in recent
months. The Nationwide (-0.2% m-o-m) and Halifax (-0.9% m-o-m) series both fell in December, but the Nationwide
series had shown three consecutive months of increasing prices before that. However, both the Rightmove (-2.7%
m-o-m) and Hometrack (-0.2% m-o-m) surveys showed further monthly declines in asking prices.
• The latest RICS survey showed a net balance of 16% of surveyors reporting price declines in December, slightly lower than the month before. However, London remains the only region registering price increases.
• Activity in the UK housing market was firmer in December. The RICS survey showed that new buyer enquiries have
been positive for four consecutive months. Housing transactions and mortgage approvals have also picked up.
Tighter credit conditions still a restraint
• Despite better-than-expected activity, the strains in the banking system resulting from uncertainty in the eurozone
could weigh on the housing market. The Bank of England's Q4 Credit Conditions Survey showed mortgage supply
falling, with further falls expected in the coming months.
• Banks appear to be worried about the worsening economic outlook for both the UK and Europe, and are tightening
lending standards accordingly. Lenders expect the criteria for granting a mortgage to toughen significantly
in 1Q12.
• The eurozone sovereign debt crisis has caused interbank rates to increase and this is one channel of
contagion to the UK. UK banks are reducing their risk appetite as their funding costs rise while the economic outlook
worsens.
• The lack of confidence in the economy could hurt demand. Although enquiries improved in 3Q11, lenders are now
reporting a sharp fall mortgage demand in 4Q11, which is expected to continue to get worse in 1Q12.
• We forecast that the UK economy enters recession in the first half of 2012 (see recent note, UK Policy: TINA or
Turner?). Low interest rates and Quantitative Easing from the Bank of England has helped affordability,
but policy may be running into diminishing returns. Meanwhile, the government's fiscal tightening looks set to
intensify. We expect unemployment to rise, potentially leading to more repossessions. It is difficult to see a sustained
rebound in the UK housing market in light of these headwinds.
