False dawn for UK housing market, says Fitch

7 October 2009

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 Q1 2009.

Brian Coulton, head of global economics and EMEA Sovereigns at Fitch Ratings, says: "The UK's average house price to income ratio remains significantly higher than the long term average.

"A 30% fall from the peak of October 2007 would bring this ratio back in line with the long term average."

In comparison, he says the house price declines in the recession of the early 1990s 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.

It also says that the drag of rising unemployment and low wage inflation is yet to be significantly reflected in house prices.

It predicts that unemployment will peak next year and remain close to that high into 2011 and 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.

Attractively priced funding over 80% LTV remains scarce, despite the fact that some lenders have recently increased the LTV limits at which they are prepared to lend.

It says the average UK house price is approximately £162,000. If mortgage availability stabilises at current LTV limits, according to data from the Nationwide Building Society this would mean a first-time buyer having approximately £32,000 in cash as a deposit to buy a house.

The typical pre-tax salary in the UK is approximately £25,000, according to the Office of National Statistics.

But Fitch adds that discussions with a number of high street lenders it says it is apparent that the majority of lenders have introduced a number of other policy changes that mean obtaining a loan is more difficult.

Most lenders have amended score card cut offs in order to increase the score needed to obtain a loan.

It adds that a number of lenders are also scrutinising the source of the deposit to ensure that it does not come from other recent borrowings. Some lenders are also declining loans where they see evidence of significant debt consolidation, regardless of whether the LTV and credit score are within policy.