UK Bank stress test too extreme on housing market slump
Despite the recent deterioration in the UK housing market, we think the doomsday scenario set out in the Bank of England’s latest banking stress test is extremely unlikely, based on our modelling. What’s more, because it so extreme, the stress test makes further substantial declines in mortgage lending and house prices less likely.
What you will learn:
- The 31% collapse in prices envisaged in the BoE’s scenario is nearly twice as large as the average fall seen during previous large UK housing downturns. Indeed, using the parameters of the scenario in our own model, we estimate the house price-to-income ratio would fall by more than one-third to levels last seen in the early 2000s.
- In comparison, our baseline forecast envisages a 12% start-to-trough fall in house prices over the next two years. A larger increase in interest rates or more significant deterioration in the labour market than currently expected would be key triggers for a worse outcome.
- We think several factors will limit the extent of a housing downturn in the UK, such as the high proportion of fixed rate mortgages that will slow the pass-through from higher rates. UK households have also deleveraged to a significant extent over the past decade. And banks’ balance sheets are much healthier now than at the onset of the global financial crisis, which should quash any negative feedback loops.
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