UK House Price Risk For NAB

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This story features NATIONAL AUSTRALIA BANK LIMITED.
For more info SHARE ANALYSIS: NAB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Morgan Stanley analysts note that while the recovery of housing supply in the UK remains relatively weak post-GFC, real household disposable income growth continues to be weak. MS is forecasting 150 basis points of Bank of England cash rate increases over the next two years from the 0.5% rate put in place in 2008 which is as yet untouched. There may be some pressure on mortgage margins which banks will need to absorb, but the outlook for housing demand is subdued.

From the banks' perspective, MS does not expect any loosening of credit standards or increases in allowable loan-to-value ratios to offset weak demand. Higher deposits will thus remain in place and with little relief on affordability the analysts see the equation as resulting in a 10% drop in house prices over the next two years.

This will affect higher impairment (bad and doubtful debt) charges on bank mortgage books and foreclosure recovery prices will be lower in a falling market. If banks choose to be conservative, higher capital requirements are likely. And bank funding costs are likely to increase, further constraining mortgage growth.

When the Australian banks reported last month National Australia Bank ((NAB)), being the only one of the Big Four with a UK business, provided no new news. Analysts took no news as good news given news from the UK is usually bad, and combined with strong mortgage growth in Australia following aggressive marketing, FNArena database brokers elevated NAB to top pick on a consensus basis.

UBS led the brokers in concern over a rather alarming increase in 30 and 60-day arrears on bank mortgage books sourced almost entirely from 2008 first home buyers who were armed with a big stimulus hand-out from the government and an RBA emergency cash rate. The RBA is set to raise again shortly (if not tomorrow) and the average house price in Australia has begun to tip over. While the housing market remains substantially under-supplied, there are growing fears Australia, too, will suffer a notable pullback in prices.

Not great news on either side of the world for the brokers' top bank pick.
 

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