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Economic outlook and mortgage market implications

Economic outlook and mortgage market implications. Little recovery in sight Martin Gahbauer Senior Economist. Outline. 3 negative shocks to mortgage transactions “Credit crunch” Economic downturn House price expectations Future prospects for activity. Shock #1: Credit Crunch.

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Economic outlook and mortgage market implications

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  1. Economic outlook and mortgage market implications Little recovery in sight Martin Gahbauer Senior Economist

  2. Outline • 3 negative shocks to mortgage transactions • “Credit crunch” • Economic downturn • House price expectations • Future prospects for activity

  3. Shock #1: Credit Crunch

  4. Shock #1: Credit Crunch

  5. Credit crunch impact on lending criteria

  6. Shock #2: Economic downturn • Economic output likely to fall over next year • Domestic demand to be hit hardest • Noticeable recovery not likely before 2010

  7. Shock #2: Economic downturn

  8. Shock #2: Economic downturn

  9. Mortgage Affordability • Falling real incomes are a problem … • … especially since affordability metrics were stretched to begin with

  10. Labour market beginning to buckle • Unemployment rate likely to rise appreciably • Most job losses so far in construction, manufacturing and hotel/restaurant sectors

  11. Shock #3: House price expectations

  12. Shock #3: House price expectations

  13. Big impact of shocks on lending volumes

  14. Impact of shocks on lending volumes II

  15. Reasons to be cheerful: Inflation now peaking …

  16. … and base rate likely to fall sharply

  17. Market will eventually recover • Valuations will adjust to more affordable level • Rental yields likely to rise well above “risk-free” rate of return • US rescue plan may boost investor confidence • Economy and employment outlook should improve by 2010 • Low activity has been leading to build-up of pent-up demand

  18. Demographic projections still favourable

  19. Specific market dynamics • House purchase: • Activity should already be in a bottoming out process, albeit at extremely low levels • Expect FTB activity to recover somewhat in 2009 • Re-mortgage: • Deal maturity pipeline to slow in 2009 • Some borrowers may not meet criteria • But rate cuts should lead to more attractive deals

  20. Conclusions • Near-term outlook for transaction volumes remains very difficult • Adjustment takes time to work through system … • … but a cyclical recovery will eventually arrive

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