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Recovery in Demand for UK Housing Pressures Supply

Property prices continue to trend up in the United Kingdom as months-on-market decrease. But increasing demand may pressure housing supply in both the purchase and rental markets, and borrower performance on existing mortgages does not appear to likely to let up while economic conditions remain constricted. Nationwide's monthly House Price Index shows UK house prices rose in July, marking the fourth consecutive month of increase as low interest rates spark demand and pressure supply. The average price rose to £160,224 (US$261,159) in August, up 1.6% from July. The year-on-year price decline slowed this month to 2.7% from 6.2% in July, according to Nationwide. A rise in interest rates, although likely a long way off, may bring some equilibrium to supply and demand, said Nationwide's chief economist Martin Gahbauer. “If the various monetary and fiscal stimulus measures that have been introduced over the last year are successful in reviving growth on a sustained basis, then inflationary pressures will eventually re-emerge and necessitate an increase in interest rates to more normal levels," he said. "When this happens, it will probably have the effect of releasing additional supply back onto the market and dampening the recent rise in buyer interest. Under such conditions, the strong price increases of recent months would become difficult to sustain.” The divergence between supply and demand is not limited to the UK home buying market, with FindaProperty.com indicating in recent data that as the UK rental market continues to recover a shortage of rental houses might arise. UK rental rates are up £4 to £829 per calendar month in August, the highest rate in six months. Rental stock is down 2% in August from July, according to FindaProperty.com. Relatively strong demand for rental houses and limited supply post a mismatch between supply and demand, with houses the preferred form of accommodation. "In the current environment, houses for rent in London are faring somewhat better, with some families who in other circumstances would have bought a house turning to the rental market instead," said director Michael O'Flynn. "I think we may have to wait until there is a widespread uplift in the economic outlook and an improvement in the jobs market before we see a real recovery in the rental market in London.” For now, property sales in London are picking up speed as properties spend less and less time on market before sale. Central London property is selling quickly at an average 4.7 months on market from list to contract, compared with 8.6 months a year ago, according to property consultant Cluttons. "Prices have shown marginal growth over the first half of the year and are expected to show an equivalent fall in the second half," the firm said in a report. "We believe that values are close to their lowest point under current market conditions. However, price levels will be vulnerable if there is a significant increase in supply, with demand unlikely to increase proportionately." Despite stabilizing values of properties for sale, the performance of securitized UK mortgages continues to deteriorate. The rate of 90 plus day delinquencies among UK residential mortgage-backed securities (RMBS) doubled to 1.8% in Q209 from 0.9% in the year-ago quarter, according to Moody's Investors Service. UK prime delinquencies continued to increase in the quarter, and performance is likely to keep trending downward as the UK economy remains in recession and unemployment remains high. The UK RMBS space is seeing a similar patch of low issuance as the US market, with no new RMBS issuance in the UK in Q209. Write to Diana Golobay.

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