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

Outline 3 negative shocks to mortgage transactions 1. “Credit crunch” 2. Economic downturn 3. House price expectations Future prospects for activity

Shock #1: Credit Crunch

Credit crunch impact on lending criteria

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

Shock #2: Economic downturn

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

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

Shock #3: House price expectations

Big impact of shocks on lending volumes

Impact of shocks on lending volumes II

Reasons to be cheerful: Inflation now peaking …

… and base rate likely to fall sharply

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

Demographic projections still favourable

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

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