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UNCLAS SECTION 01 OF 02 LONDON 001049 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV UK
SUBJECT: HOUSING MARKET GREEN SHOOTS COULD SUFFER "RENEWED 
RECESSIONARY FROST" 
 
REF A) LONDON 1040 REF B) LONDON 949 
 
LONDON 00001049  001.2 OF 002 
 
 
¶1.  (SBU) Summary:  The UK is beginning to see positive signs in the 
housing market, but recovery is fragile and in its early stages. 
Adrian Coles, director-general of the Building Societies Association 
(BSA), told us a microscope is necessary to see the green shoots, 
but house prices may be bottoming out.  Surveyors are recording 
increased buyer inquiries, share prices of house building companies 
are up, and mortgage lending is starting to strengthen, although it 
remains much weaker than a year ago.  Coles is skeptical HMG's 
multitude of initiatives, designed to assist a house market 
recovery, are having a significant impact and thinks the UK may have 
to just ride out the recession and the accompanying house price 
correction.  End Summary. 
 
Housing Demand Returning - But Problems Ahead 
--------------------------------------------- 
 
¶2.  (U) The UK housing market is showing signs of bottoming out, 
though industry experts hesitate to declare the start of a sustained 
recovery.  Nationwide Building Society's house price index for March 
showed a surprising uptick, with an increase of 0.9 percent. 
Industry website Rightmove announced vendors are setting prices 1.8 
percent higher in April than March.  According to the company, 
property asking prices increased three months in a row.  Miles 
Shipside, commercial director of Rightmove, said: "My view is that 
many sellers are still starting too high, but the fact they are 
coming to market in greater numbers and feel they can ask more shows 
a strengthening in resolve and confidence, which is an encouraging 
sign." 
 
¶3.  (SBU) Housing demand is slowly returning because of perceived 
affordability, according to Coles of the BSA.  He told us first-time 
buyers are beginning to think it is a good time to enter the market, 
with prices having fallen significantly over the past year. 
However, he cautioned that this renewed demand will be undermined 
over the next year by volatility in the job market.  With 
unemployment set to reach at least three million by the end of the 
year, Coles warned the fragile housing market recovery could succumb 
to a "renewed recessionary frost" as demand slips away and people 
face layoffs and difficulty returning to the job market.  Job 
security, he said, is likely to remain the biggest obstacle to 
increased demand. 
 
Mortgage Supply Improving But Still Weak 
---------------------------------------- 
 
¶4.  (SBU) While mortgage supply is improving, it is still well below 
normal levels and is insufficient to meet pent-up demand, according 
to Coles.  Figures from the Council of Mortgage Lenders (CML) showed 
a 4 percent increase in mortgages approved in January and February, 
yet the total of 24,300 was 46 percent below the same period last 
year.  There were 9,400 loans to first-time buyers - a 7 percent 
monthly increase - but significantly less than the 17,400 in 
February 2008.  Coles noted the mortgage market that will emerge 
from the downturn will be dramatically different from the market at 
its peak in 2007.  High loan-to-value (LTV) mortgages have 
disappeared from the market.  First-time buyers had an average 
deposit of 25 percent in February, up from 11 percent the same time 
last year, a new record according to CML figures.  Coles said higher 
LTV mortgages are available but come with strings attached and are 
geared towards wealthier borrowers.  Mortgage supply is strongest in 
the sub-60 percent LTV range. 
 
¶5.  (SBU) Coles was optimistic credit availability is likely to 
improve over the next quarter (Reftel A).  Both Royal Bank of 
Scotland (RBS) and Lloyds Banking Group made mortgage lending 
commitments when they entered into HMG's Asset Protection Scheme 
(GBP 9 billion and GBP 3 billion respectively) and Northern Rock, 
Barclays and HSBC have all announced self-imposed higher lending 
targets.  However, Coles cautioned this lending is just a drop in 
the ocean compared to how far lending levels have declined. 
Mortgage supply is unlikely to return to pre-recession levels in the 
near term because of significant risk aversion amongst lenders, 
which will worsen if arrears and repossessions increase as expected. 
 Coles added that wholesale capital markets are still effectively 
closed and the flow of retail deposits is stifled. 
 
Government Initiatives Not Helping 
---------------------------------- 
 
¶6.  (SBU) The UK Government announced a number of schemes to help 
homeowners during its 2009 Budget released April 22 (Reftel B). 
However, Coles is dubious about how effective these schemes will be 
given current market conditions.  He said the guarantee for 
mortgage-backed securities will not achieve a great amount.  It will 
just increase the amount of government-backed paper.  He said 
 
LONDON 00001049  002.2 OF 002 
 
 
government guarantees lose value as the number of guarantees 
increase.  He was equally pessimistic about the extended stamp duty 
(tax on home purchases) holiday for purchases under GBP 175,000 
($254,000).  He said stamp duty is not one of the biggest 
impediments to home purchases, so an extended holiday is unlikely to 
achieve increased demand.  He warned that lenders are facing 
conflicting pressures from the Financial Services Authority (FSA) 
and HMG - with the FSA urging lenders to be extremely cautious while 
HMG is pushing for increased lending to stimulate the market.  He 
concluded that the UK is experiencing a hangover from an 
extraordinary housing price boom and will need to ride out the 
inevitable period of correction.  As such, there is a limit to what 
government initiatives will achieve. 
 
TOKOLA