THE ECONOMIC & MARKET OUTLOOK MORTGAGE EVENT 2006 Martin Ellis Chief Economist

UK Economy: growth is improving … H

UK Economy: inflation & interest rates are edging up … H

UK Economy: prospects … Growth to be around long-term average over next 12 months. More balanced growth – less dependent on the consumer. Interest rates to rise but not dramatically. H

Household Finances: debt : income ratio still rising … H

Household Finances: income gearing below early 90s levels … H

Household Finances: wealth rising more quickly than debt … H

Household Finances: mortgage arrears remain low … H

Household Finances: overview … Employment levels are high. Strong household sector balance sheet. Homebuyers are putting down bigger deposits than in previous cycles. Arrears and repossessions remain low.

The UK housing market: house price inflation is moderating … H

The UK housing market: turnover has recovered … H

The UK housing market : supply shortages … H

The UK housing market: north/south divide widening again? H

UK housing market prospects: strong fundamentals … H

UK housing market prospects: but constraints exist … Pressure on households’ discretionary income from substantial utility bill rises and above inflation council tax increases. Speculation of interest rate rises and recent upward movement in variable and fixed rate mortgage pricing. High house prices in relation to earnings. H

Mortgage Market: pick-up in house purchase loans … H

Mortgage Market: fixed rate lending remains high … H

Mortgage Market: but fixed rates are less attractive … H

Conclusions Economy back to long-term historical average and in good health. Interest rates rising but not dramatically. Income shocks that caused difficulties in early 1990s not to be repeated so downside risks highly unlikely to materialise. Stable housing market. H