Introduction

Mid-September 2007 has seen the most dramatic fallout so far from the US sub-prime mortgage crisis, with events at Northern Rock leading to the first 'run on a bank' in the UK in over 100 years. With less funding available, what implications will the latest developments have on the performance of the UK mortgage market?

Scope

DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Funding issues are likely to impact upon the UK mortgage market going forward 2
In the UK, mortgage bank Northern Rock was hit hard by funding issues 2
Reduced funding will impact negatively upon the UK mortgage market in 2008 2
The credit squeeze has led to an increase in inter-bank borrowing costs 3
Less funding also means that lenders will have to decrease lending to certain customer segments 4
Mortgage gross lending is still set to hit a record level in 2007, despite funding issues 4
An outstanding H1 2007 will ensure that mortgage lending reaches a new peak in 2007 5
2008 will be a slow year for the UK mortgage market 7
Under the Datamonitor view, the UK mortgage market will contract to £332.2 billion in 2008 7
Given the unpredictability of the UK mortgage market, Datamonitor has analyzed two additional alternative scenarios 8
The pessimistic scenario assumes a house price crash 8
The optimistic scenario adopts a bright view of the economy 10
APPENDIX 12
Supplementary data 12
Definitions 15
Bank of England base rate 15
CAGR 15
Gross advances 15
LIBOR 15
Loan-to-value (LTV) 15
Second charge loan 15
Sub-prime 16
Methodology 16
Forecasting methodology 16
Further reading 17
Ask the analyst 18
Datamonitor consulting 18
Disclaimer 18
List of Tables
Table 1: Forecasted gross advances in the UK residential market under the Datamonitor view, 2006-11f 8
Table 2: Forecasted gross advances in the UK residential market under a pessimistic view, 2006-11f 9
Table 3: Forecasted gross advances in the UK residential market under an optimistic scenario, 2006-11f 11
Table 4: Three-month LIBOR rate and Bank of England base rate, (Table 1 of 2) 12
Table 5: Three-month LIBOR rate and Bank of England base rate, (Table 2 of 2) 13
Table 6: UK monthly gross mortgage advances, 2006-07, January-June, (£m) 14
Table 7: Forecast macroeconomic variables used in Datamonitor view scenario, 2005-11f 14
Table 8: Forecast macroeconomic variables used in the pessimistic scenario, 2005-11f 14
Table 9: Forecast macroeconomic variables used in the optimistic scenario, 2005-11f 15
List of Figures
Figure 1: Despite a stabilized base rate, the three-month LIBOR rate has risen significantly, September 2, 2007 to September 21, 2007 3
Figure 2: UK gross mortgage lending in the first six months of 2007 outperformed 2006 levels 5
Figure 3: Datamonitor forecasts a 7% decrease in gross lending in the last four months of 2007 over 2006 levels 6
Figure 4: Under the Datamonitor view, gross lending in the UK mortgage market will contract to £332.2 billion in 2008 7
Figure 5: Under a pessimistic scenario, gross lending in the UK mortgage market will reach a low of £292.9 billion in 2008 9
Figure 6: Under the optimistic scenario, gross lending in the UK mortgage market will grow healthily to reach £425.3 billion in 2011 10