Decoupling the housing market from the real economy might enable it to stage its own mini-recovery
The economic data for the UK remains patchy at best and the international environment has deteriorated significantly in the last few months. The EC is now forecasting that EU output will fall by 0.3 per cent in 2013 and for Germany to see economic growth of only 0.5 per cent.
A key economic scenario worthy of examination is the possibility of the mortgage and housing market decoupling from the real economy and staging a mini recovery of its own. Traditionally we look to a wider recovery in the macro-economy before seeing this feed through into the household and mortgage sector.
In terms of mortgage stock growth over the last 30 years there have been two periods of rapid lending growth in the late 1980s and again in 2003-2007.
Growth in GDP does tend to lead the mortgage market both down and up.
The current outlook for nominal GDP growth is for this to return to around 4 per cent per annum in 2015 and then to around 5 per cent in the medium term.
Nominal household income growth should also return to around 4-5 per cent a year, although currently nominal wage growth is much nearer to 2 per cent.
Looking at previous cycles given the right sentiment it is possible for the mortgage and housing market to decouple itself from the woes of the real economy. This is difficult to sustain in the medium term without a corresponding response in domestic demand but the housing market provides a positive feedback loop of its own.
But possible alternative path for the mortgage market assumes a decoupling from the real economy combined with a little over exuberance.
This stronger path in mortgage lending requires several things to happen.
Firstly, that banks make loans more freely available at higher LTV and secondly become far more relaxed about capital levels.
Both of these assumptions are large ones but sometimes stronger competition in the market can provide the stimulus for rapid change.
It is difficult to see this happening without a certain degree of breaking ranks amongst lenders as they reassess the potential upside to the market. A couple of strong lenders could lead the market into the upturn and drag the rest of the market with them.
There will however be substantial losers in this process as mortgage market customers tend to be very price sensitive.
Assuming the various hurdles could be overcome, this lending path would generate a 30 per cent bigger gross mortgage market. This alone would add up to 0.5 per cent to consumer spending and economic growth.
Although the most likely outcome for the UK is a long and relatively weak economic recovery, the mortgage and housing market will play a key support role.
Some extra competition would encourage the reluctant to lend, so policymakers must concentrate on making this happen.