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

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

3. 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

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

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