Tyne & Wear Research & Information (TWRI)

1. Tyne & Wear Research & Information (TWRI) supported jointly by the Cities of Newcastle Upon Tyne and Sunderland and the Metropolitan Boroughs of Gateshead, North and South Tyneside.

2. The Credit Crunch and Housing Markets in Tyne & Wear A Report for TW Housing Partnership in August 2008 Peter Sturman Senior Research Officer, TWRI November 2008

3. SUMMARY • Credit crunch (CC) is, by far, the main driver of the fall in housing market activity and house prices. (But also due to rise in energy and food prices.) • Notclear when the housing market will stabilise and start to recover. At this stage [in Aug. 2008], based on the Crosby [Interim, July ] report, it should not be expected before 2010. • In TW, net lending is expected to halve in 2008 compared with 2007.Sale transactions to halve, to about 10,000. • TWRIexpects house prices to fall by about 5-12% in 2008 and a similar amount in 2009. Some commentators [notably Capital Economics / R. Bootle] predict further falls in 2010.

4. Impacts - on a) Housing Markets • 2008 new housing supply ‘could nearly halve’(50-70% of 2007 levels) [since Aug. probably turned lower] • No market in housing land • Land prices falling more quickly than houses • Further rationing of mortgages by lenders(policies applied will be important in determining the effects) • Further reduction of FTB in the market • Greater use of savings, borrowings from family and friends (to reduce debt and pay for a deposit)

5. Impacts - b) Sectoral impacts • Displacement of housing demand from the owner-occupied to PRS(private rented sector) • Displacement of demand from new to existing housing • Vacancy rates expected to fall for PRS and social housing but rise in owner-occupied sector

6. Impacts - c) Social impacts • ‘Hidden households’ increase(where a young ‘household’ shares a house with parent) • Reduce job mobility(more unwilling long distance commuting) • Repossessions in TW expected to rise(to at least 380 in 2008, and could be as high as 760 in 2009) [*] • Negative equity will emerge and spread(the effect on market sentiment could be significant. Forced sales can be expected) • Characteristics of borrowers most “at risk” can be predicted (not the number in TW)

7. Impacts - d) Spatial impacts • Ability to map some of these characteristics and • identify neighbourhoods where “at risk” households are concentrated(thus where monitoring and interventions should be focused)

8. Impacts - e) Economic impacts(of the housing downturn) • 2,000 house-building jobs likely to be lost by mid-2009 [now looking a significant under-estimate] • 1,800 jobs lost from related financial services [N Rock plus Citi 400] • TWRI expects the CC to depress consumer spending in TW (by ~0.5-1% in 2009*)

9. Opportunities and demands on [mainly Public] Services a) Opportunities for Public Policy • Buy/Rent Empty Homes • Buy Land • Create flexible tenure options • Mortgage Rescue • Diversify investment drawing in new lenders • Re-finance banking sector[the only purely national recommendation] • Possibly create new delivery vehicles

10. Opportunities and demands on [mainly Public] Services b) Service demands TWRI expects a significant rise in need and demand for independent and trusted advice in areas such as: • Debt-counselling • Mortgage-switching • Repossession and legal action • Housing options

11. Mortgages and Household (hh) budgets in TW • Higher effective interest rates will blow a considerable hole in many hh budgets • This could depress consumer spendingin TW by ~ ½-1% in 2009 • Previously (nationally) consumer spending had been growing at over 3%pa • Households with a mortgage will generally have to pay more interest [still poss due to wider spread +LIBOR] • TWRI estimates the average TW outstanding amount ~£70-80,000 (for hh with a mortgage,end 2007) • 1% pp rise in the effective interest rate would increase their annual hh expenses by £700-800

12. Trajectory of House Prices • House prices expected to fall for a few years until they have fallen by about a fifth or a quarter [on TWRI’s central expectation (in Aug)] • Average house price in TW could fallfrom £140,000 (late 2007) to ~ £105-120,000 by, say, early 2010

13. Lessons from the USA • The US housing downturn started ~ a year earlier (late 2006) than in Britain (late 2007) • Over 1/5 of US [mortgaged?] homes believed to be in negative equity (“under-water”) BUT: • UK FTBs down to 30% of the total (from ~50% in the 1980s) • Average deposits have grown (from 12% of the price in 1990 to 20%) • Northern Rock average LTV of (only) 60% and 85% on its new lending

14. Economic causes (of the Over-Lending to Households) • Economic environment “stability”(steady growth with low inflation)-ironically encouraging risk-taking- • Deregulation of credit (esp. mortgage lending) made it very easy to borrow

15. Broader economic impacts of the CC • Economic forecasts revised downwards substantially since October • Business bodies significantly more gloomy than many other forecasters • BCC and CBI have forecast ~1m (4pp) rise in (LFS) unemployment by end-2009 or 2010 • Other forecasters ~ half the figure above BUT • LGA (by PACEC ) forecast an employment drop of 1.7m; incl 70,000 (6%) in NE by 2010

16. Possible Policy Remedies for the CC(by UK, EU, G7, G20 and BIS etc.) Aim is to get the banks to lend normally, so as to support economic activity (and employment) • Guarantee funding raised by the banks(Govt offered to guarantee £200bn in Oct.) • Encourage banks to cut hoarding of (equity) capital • Allow banks to write down losses over a longer period(as in the 1980s)

17. E-mail: twri@twri.org.uk Web Site:www.twri.org.uk