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Transcript of Tyne & Wear Research & Information (TWRI) supported jointly by the Cities of Newcastle Upon Tyne and...
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Tyne & WearResearch & Information
(TWRI)
supported jointly by the Cities of Newcastle Upon Tyne and Sunderland and the Metropolitan Boroughs of Gateshead, North and South Tyneside.
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The Credit Crunch and Housing
Markets in Tyne & Wear
A Report for TW Housing Partnership
in August 2008 Peter Sturman
Senior Research Officer, TWRI November 2008
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• Credit crunch (CC) is, by far, the main driver of the fall in housing market activity and house prices. (But also due to rise in energy and food prices.)
• Not clear when the housing market will stabilise and start to recover. At this stage [in Aug. 2008], based on the Crosby [Interim, July ] report, it should not be expected before 2010.
• In TW, net lending is expected to halve in 2008 compared
with 2007. Sale transactions to halve, to about 10,000. • TWRI expects house prices to fall by about 5-12% in 2008
and a similar amount in 2009. Some commentators [notably Capital Economics / R. Bootle] predict further falls in 2010.
SUMMARY
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• 2008 new housing supply ‘could nearly halve’(50-70% of 2007 levels) [since Aug. probably turned lower]
• No market in housing land
• Land prices falling more quickly than houses
• Further rationing of mortgages by lenders(policies applied will be important in determining the effects)
• Further reduction of FTB in the market
• Greater use of savings, borrowings from family and friends (to reduce debt and pay for a deposit)
Impacts - on a) Housing Markets
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• Displacement of housing demand from the owner-occupied to PRS (private rented sector)
• Displacement of demand from new to existing housing
• Vacancy rates expected to fall for PRS and social housing but rise in owner-occupied sector
Impacts - b) Sectoral impacts
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• ‘Hidden households’ increase(where a young ‘household’ shares a house with parent)
• Reduce job mobility(more unwilling long distance commuting)
• Repossessions in TW expected to rise(to at least 380 in 2008, and could be as high as 760 in 2009) [*]
• Negative equity will emerge and spread(the effect on market sentiment could be significant. Forced sales can be expected)
• Characteristics of borrowers most “at risk” can be predicted (not the number in TW)
Impacts - c) Social impacts
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• Ability to map some of these characteristics and
• identify neighbourhoods where “at risk” households are concentrated(thus where monitoring and interventions should be focused)
Impacts - d) Spatial impacts
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• 2,000 house-building jobs likely to be lost by mid-2009 [now looking a significant under-estimate]
• 1,800 jobs lost from related financial services [N Rock plus Citi 400]
• TWRI expects the CC to depress consumer spending in TW (by ~0.5-1% in 2009*)
Impacts - e) Economic impacts (of the housing downturn)
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• Buy/Rent Empty Homes
• Buy Land
• Create flexible tenure options
• Mortgage Rescue
• Diversify investment drawing in new lenders
• Re-finance banking sector[the only purely national recommendation]
• Possibly create new delivery vehicles
Opportunities and demands on [mainly Public] Services
a) Opportunities for Public Policy
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TWRI expects a significant rise in need and demand for independent and trusted advice in areas such as:
• Debt-counselling
• Mortgage-switching
• Repossession and legal action
• Housing options
Opportunities and demands on [mainly Public] Services
b) Service demands
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• Higher effective interest rates will blow a considerable hole in many hh budgets
• This could depress consumer spendingin TW by ~ ½-1% in 2009
• Previously (nationally) consumer spending had been growing at over 3%pa
• Households with a mortgage will generally have to pay more interest [still poss due to wider spread +LIBOR]
• TWRI estimates the average TW outstanding amount ~£70-80,000 (for hh with a mortgage, end 2007)
• 1% pp rise in the effective interest rate would increase their annual hh expenses by £700-800
Mortgages and Household (hh) budgets in TW
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• House prices expected to fall for a few years until they have fallen by about a fifth or a quarter [on TWRI’s central expectation (in Aug)]
• Average house price in TW could fall from £140,000 (late 2007) to ~ £105-120,000 by, say, early 2010
Trajectory of House Prices
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• The US housing downturn started ~ a year earlier (late 2006) than in Britain (late 2007)
• Over 1/5 of US [mortgaged?] homes believed to be in negative equity (“under-water”)
BUT:
• UK FTBs down to 30% of the total (from ~50% in the 1980s)
• Average deposits have grown (from 12% of the price in 1990 to 20%)
• Northern Rock average LTV of (only) 60% and 85% on its new lending
Lessons from the USA
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• Economic environment “stability”(steady growth with low inflation)-ironically encouraging risk-taking-
• Deregulation of credit (esp. mortgage lending) made it very easy to borrow
Economic causes (of the Over-Lending to Households)
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• Economic forecasts revised downwards substantially since October
• Business bodies significantly more gloomy than many other forecasters
• BCC and CBI have forecast ~1m (4pp) rise in (LFS) unemployment by end-2009 or 2010
• Other forecasters ~ half the figure above
BUT
• LGA (by PACEC ) forecast an employment drop of 1.7m; incl 70,000 (6%) in NE by 2010
Broader economic impacts of the CC
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Aim is to get the banks to lend normally, so as to support economic activity (and employment)
• Guarantee funding raised by the banks(Govt offered to guarantee £200bn in Oct.)
• Encourage banks to cut hoarding of (equity) capital
• Allow banks to write down losses over a longer period (as in the 1980s)
Possible Policy Remedies for the CC
(by UK, EU, G7, G20 and BIS etc.)