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P 311437Z JUL 09
FM AMEMBASSY LONDON
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RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 03 LONDON 001760 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV UK
SUBJECT: UK HOUSING MARKET SHOWS SIGNS OF RECOVERY BUT LONG-TERM 
OUTLOOK REMAINS UNCERTAIN 
 
LONDON 00001760  001.2 OF 003 
 
 
¶1.  (SBU) Summary: UK housing prices showed a slight increase in 
June and July, and mortgage lending was also up.  Despite these 
signs of recovery, the market outlook remains uncertain.  Market 
prices are still down, year-on-year, 6.2 percent over the past 12 
months as reported by Nationwide Building Society, and 15 percent as 
reported by Halifax, the UK's largest mortgage lender.  Nationwide 
reported July house prices are 14.6 percent lower than their peak in 
late 2007; Halifax said June housing prices are down 21 percent from 
the peak in August 2007.  Concerns remain about the limited mortgage 
lending being offered and the effects of rising unemployment.  UK 
government actions to help home owners facing repossession, 
first-time home buyers and the mortgage industry seem to have had 
limited success so far.  While many believe the UK has seen the 
worst of the slump, a sustained housing market recovery remains far 
off.  End summary. 
 
Housing Indicators 
------------------ 
 
¶2.  (U) House prices have fluctuated so far this year, with the 
largest UK lenders reporting sometimes conflicting price trends 
throughout the first six months of 2009.  In July, Nationwide 
reported a 1.3 percent rise in the average home price to GBP 
158,871, marking the third consecutive month of increases.  The 
group announced a cumulative 1.3 percent increase in prices since 
the start of 2009.  In June, however, Halifax registered a 0.5 
percent decrease in prices from the previous month. (Note: Halifax 
price index is seasonally adjusted while the Nationwide index is 
unadjusted.)  Property website Rightmove reported a 0.4 percent 
month-on-month price fall in June, but a 0.6 percent rise in July. 
Additionally, this group reported that asking prices are up by 6.7 
percent from the start of 2009.  For the first time since January 
2008, the house price index from Land Registry increased in June. 
The index showed a 0.1 percent rise in the price of an average home 
in England and Wales, with the rate of annual decline narrowing to 
14 percent. 
 
¶3.  (U) New home construction is down dramatically, falling 44 
percent in the second quarter from last year's levels.  There were 
18,340 seasonally adjusted housing starts in England in the quarter, 
a 13 percent increase from the last quarter of 2008, but still well 
below levels from 2008.  Annual housing start figures have 
consistently declined over the past few years, falling 51 percent 
last year from peak levels in 2005-2006.  Despite recent downward 
revisions in projected repossessions and arrears for 2009 by the 
Council of Mortgage Lenders (CML), the numbers are still expected to 
increase.   The CML reported 17,049 repossessions in the three 
months to June, and predicted that 2009 might see a total of 65,000 
repossessions.  This 2009 prediction was revised down from 75,000 
after a range of government programs were introduced to help those 
threatened by repossession.  Mortgage arrears are increasing more 
markedly than repossessions and the CML estimated that 3.24 percent, 
or 360,000, of all mortgages will be in arrears of at least 2.5 
percent of their outstanding debt in 2009.  This is 15 percent less 
than previously predicted, but double the amount of homeowners in 
arrears at the end of 2008.  Lower mortgage rates allow greater 
capacity for banks to work with borrowers with variable rate 
mortgages who are facing arrears and more homeowners seem to be 
making contact with their lenders to find mortgage help.   Rightmove 
predicted that unemployment driven repossessions and arrears are 
likely to drag on into 2010 and 2011. 
 
Are Banks Being Tight-fisted or Is There Limited Demand? 
------------------------- ------------------------------ 
 
¶4.  (U) While overall lending volumes remain weak, there have been a 
few steady signs of improvement in the mortgage market over the past 
few months, with the Council of Mortgage Lenders (CML) and the Bank 
of England both reporting lending increases and encouraging trends 
in the credit market in June.  The CML reported a 17 percent 
increase in gross mortgage lending from GBP 10.5 billion in May to 
GBP 12.3 billion in June, which was still, however, 48 percent lower 
than June 2008 levels.  The group forecast gross mortgage lending of 
GBP 145 billion this year and revised upward its forecast for net 
mortgage lending in 2009 from a GBP 25 billion contraction to a 
smaller GBP 5 billion contraction from 2008 levels.  Official data 
for May from the Bank of England reported lending is at its lowest 
level since records began in April 1993, but also showed a slight 
rise in the flow of net mortgage lending and mortgage approvals from 
major UK lenders in June. 
 
¶5.  (U) Many banking industry groups claim that the mortgage lending 
levels have remained low because of the lack of quality in demand. 
Paul Samter of the CML agrees, saying limited consumer demand 
continues to dampen recovery.  In its Trends in Lending report, even 
 
LONDON 00001760  002.2 OF 003 
 
 
the Bank of England acknowledged that there is subdued demand for 
mortgages and weak re-financing activity, and that both will persist 
for some time.  Industry groups have also contended that uncertainty 
about capital and liquidity requirements have constrained their 
lending. 
 
Government Efforts - Effectiveness Remains To Be Seen 
----------------------- ----------------------------- 
 
¶6.  (U) Recognizing that the lack of mortgage financing dampened 
prospects for recovery in the housing market, HMG, during the past 
six months, implemented several measures to stimulate the market and 
encourage banks to increase lending.  The Asset-Backed Guarantee 
Scheme (ABS), announced in January 2009 and made available in April, 
is a government backed guarantee on triple-A rated asset-backed 
securities, including mortgages.  Critics of the scheme argue, 
however, that restrictions on whom can take part in the plan and the 
loans offered are bringing limited success.  The Communities and 
Local Government Select Committee of Parliament called it 
"impressive, but doomed to fail."  As of July 14, none of the major 
banks had issued a security with an ABS guarantee. 
 
¶7.  (U) HMG also targeted efforts on potential home buyers and home 
owners, especially those who were in jeopardy of losing their homes. 
 HMG's Home-Buy-Direct is a shared-equity scheme aimed to combat the 
limited number of mortgages available to qualified first-time home 
buyers.  Under the program, the government purchases up to 30 
percent equity in the house, without a fee for the first five years 
of ownership.  In return, the government receives a share of any 
capital gain realized when the house is sold.  So far though, the 
program has been relatively ineffective as banks remain hesitant to 
lend to first-time buyers.  The Homeowner Mortgage Support scheme 
was introduced in April 2009 to help homeowners experiencing 
financial difficulties in the economic crisis, but it has yet to see 
a significant take off.  The plan allows borrowers to defer a 
portion of their mortgage interest payments for up to two years if 
they are experiencing a temporary, unexpected drop in income. 
Several large banks, including Lloyds Banking Group, part of 
Halifax, and Royal Bank of Scotland, have agreed to participate in 
the scheme, but the program has seen a slow start and critics 
question its effectiveness.  A deal under the scheme can take three 
to five months to process; UK authorities expect, however, more 
completed deals over the coming months. 
 
¶8.  (U) The Mortgage Rescue Scheme, announced in January 2009, is a 
GBP 285 million package of measures designed to prevent vulnerable 
families losing their homes.  The scheme, aimed at those who would 
be eligible for homelessness assistance, either provides an equity 
loan to homeowners, reducing the size of their mortgage, or 
purchases the home and rents it back to the former homeowner at an 
affordable rate.  The government owns some equity in the house as 
part of this plan, and participants are able to buy-back the equity 
of their home when they can afford to.  The UK's Department for 
Communities and Local Government said the scheme aimed to help 6,000 
families, but as of the beginning of July, only six households had 
used it to avoid repossession.  The scheme has been criticized for 
the length of its eligibility process. 
 
¶9.  (U) The UK government also extended a stamp-duty (tax on 
property purchases) exemption to relieve household tax burdens until 
the end of 2009; the House of Commons' Communities and Local 
Government Committee recommended in a report that the government not 
renew the measure after 2009.  The plan gives a one year stamp-duty 
holiday to homeowners whose properties cost less than GBP 175,000. 
While Halifax reported in May that the exemption has helped around 
45,500 buyers in England and Wales, the plan's impact on the overall 
affordability of homes is marginal. The government is also concerned 
about the limited numbers of new home construction.  The dramatic 
decline in housing starts - 44 percent in the second quarter of 2009 
in comparison with the second quarter of 2008 - prompted the UKFs 
housing minister, John Healey, to announce a GBP 1 billion 
investment program July 27 to kick-start house-building projects 
that stalled during the recession.  While the initiative remains in 
the planning stages, funding given to construction companies could 
create around 22,000 new homes in the UK. 
 
Signs of an End to the Worst, But Uncertainty Remains 
--------------------------------------------- -------- 
 
¶10.  (U) Commentators and industry players remain doubtful about the 
direction of the housing market.  The Council of Mortgage Lenders 
forecasted that gross mortgage lending will be GBP 145 billion for 
the year, but the group was cautious to release any significant 
future forecasts citing considerable uncertainty about a range of 
factors affecting the strength of the mortgage market.  The Bank of 
 
LONDON 00001760  003.2 OF 003 
 
 
England predicted mortgage lending may continue to strengthen in 
coming months and Rightmove predicted a subdued "steady state" for 
the market with a slight 7 percent increase in house prices for the 
year.  No group expects any dramatic improvements over the coming 
months but many believe the market has passed its worst point. 
Others remain more pessimistic.  Housing charity Shelter predicted 
repossessions could rise to between 100,000 and 125,000 in 2011, up 
from 65,000 in 2009. The Council of Mortgage Lenders expects there 
will be about 425,000 borrowers at least three months behind with 
their home loan payments by the end of this year. 
PricewaterhouseCoopers predicted the housing market will stay in the 
"doldrums" until the middle of next year and prices will fall a 
further 5-10 percent for the next 18 months before beginning to pick 
up. 
 
¶11.  (U) Another real concern is the effect of rising unemployment 
on the housing market.  Unemployment is expected to reach 3 million 
in the UK by the end of the year, which could add to mortgage 
payment arrears and to the number of repossessions will continue to 
increase, though at a slower rate.  Job uncertainty will also 
discourage first-time home buyers from the entering the housing 
market. 
 
¶12.  (SBU) Comment: It would be premature to predict that the UK 
housing market is on its way to a strong recovery.   Housing prices 
may have bottomed-out; however, the recent rallies could be 
temporary, especially now that the spring buying season has ended. 
The UK housing market slump from 1989 to 1996 saw four similar, 
temporary rallies before a sustained recovery occurred. 
 
MELVILLE