UK house prices to fall 10%, Morgan Stanley says

1st Jun 2011 12:24

In a research note issued this morning to their clients analysts at Morgan Stanley write that they expect to see another 10% fall in UK house prices by the end of 2012, as compared to levels at the end of last year (Q4 2010). The above on the basis of its expectations for the Bank of England's interest rate policy. Also of interest, they highlight that, in their opinion, Lloyd's is the bank most exposed to the risks arising from such a scenario coming to pass.Previously Morgan Stanley had expected a smaller fall in house prices, of 7%, but over a shorter period (4Q/4Q 2011). As well, they write, "Valuations look somewhat stretched on our metrics; we expect mortgage rates to rise over the next year and a half; and the outlook for household real income growth has weakened. Our house price model looks consistent with a ~10% fall; although it predicts a more volatile path".As far as the banking sector is concerned, they see the impact on it coming through three channels: "i) higher loan losses as collateral values fall; ii) potentially higher risk weighted assets (and capital demands) due to model changes; iii) subdued mortgage loan growth".In the specific case of Lloyds they highlight that its loan book is 58% mortgages, 27% (£90bn) of which they expect to be in negative equity by Dec 2012. This is a key driver of their £0.5bn above consensus 2012 loan loss assumptions.To be had in account, Morgan Stanley admits that their views on the UK economy and house prices are more downbeat than consensus. They only expect 1.2% GDP growth this year (consensus 1.6%). In a similar fashion, consensus expectations are for a rise in house prices in 2012. These observations may be of interest as far as market positioning in the different asset classes (and hence possible market reaction to any potential negative data surprises) is concerned, analysts at Digital Look think.Regarding the Bank of England's expected policy rate decisions, which is one of the underlying assumptions to their forecasts, Morgan Stanley expects key lending rates to rise by 150 bp by the end of 2012. However, and as a main risk, they point out that the possibility exists that, "the MPC delays action until late this year/early next year. That might make falling house prices more a story for 2012/13 than 2011/12". AB