For the last couple of years, the mortgage market has traded in a very narrow range. Last summer showed some signs of an underlying improvement in volumes but the onset of the euro crisis and extremely disappointing UK economic growth figures have dampened any prospect of recovery.
Economic output forecasts for 2012 and 2013 have been scaled back as hopes of a recovery led by investment and export have largely evaporated.
UK consumers have had to cope with an unprecedented squeeze on real incomes and this is now compounded by an increased risk of unemployment.
UK economic growth in 2011 is likely to be around 0.9% – well below its trend level of 2-2.25%.
Reducing debt leverage is essential among groups who have over-borrowed in recent years
Export driven growth is always going to be a challenge while the European economy is struggling but now we have moved into euro crisis territory, export led growth in the short term is near impossible.
Being in good shape, the non-bank corporate sector in the UK has weathered the economic storms and is very well positioned to invest and grow once it is sure the worst is behind us.
The corporate sector has a strong positive surplus and, in normal circumstances would be investing strongly for the expected upturn.
But corporate investment abstinence has become the norm owing to the sheer scale of events in Europe and in the financial markets.
Producing robust forecasts is always fraught with difficulties and that is more true than ever at the moment.
All predictions should be treated with extreme care and any caveats fully understood.
Our central forecasts in 2011 were too optimistic on economic growth but this was less true for the mortgage market – others have had to scale back volumes considerably. The main forecasts shown below are our best estimate at present. However, there are many related scenarios that should be considered and I will cover these next month. Short-term prospects for economic growth are broadly similar to 2011 but the risks are very much on the downside in 2012. Constructing an upbeat view for this year is virtually impossible without some kind of economic miracle in the eurozone.
Real household income remains under downward pressure as a result of low wage settlements combined with sticky consumer price inflation.
Higher levels of unemployment and expensive credit for low income groups will also constrain consumer growth.
Weakness in UK domestic demand and moderating inflation during the course of 2012 will certainly lead to little pressure for higher interest rates.
We do not expect to see any change in interest rates until 2014 and even then any rise will be very modest. UK five year and 10 year bonds are at all-time lows and given the outlook for growth and inflation they are unlikely to move much from current levels.
Given this downbeat assessment for prospects in the UK, it is not surprising the mortgage and housing markets are expected to remain weak. The second table (below) shows the main market forecasts.
House prices and transactions are expected to fall further in 2012. Assuming the economic picture improves by early 2013, this should allow some firming up of prices, but transaction volumes are forecast to remain low as lenders continue to focus on quality of asset rather than volume growth.
Gross mortgage lending is still forecast to decline to £132bn in 2012 before gradually returning to more normal levels by 2015/2016.
Ongoing balance sheet adjustment and a flaky house price outlook are unlikely to encourage significant lending volumes.
Underlying this outlook is a dramatic improvement in personal sector debt ratios and a slightly improved retail funding outlook.
This adjustment will be very positive for the mortgage market in the longer term but reducing debt leverage is essential among groups who have over-borrowed in recent years.
Next month I will focus on some of the key scenarios around these central forecasts. This will include a closer look at the impact of a possible deepening euro crisis and the potential for a double dip in the world economy.