You are on page 1of 15

STRUCTURED FINANCE RESEARCH

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions
Primary Credit Analyst: Mark S Boyce, London 02071768397; mark.boyce@standardandpoors.com Secondary Contact: Andrew H South, London (44) 20-7176-3712; andrew_south@standardandpoors.com

Table Of Contents
Northern Arrears Remain Higher Than In The South The North-South Unemployment Gap Persists Negative Equity In Southern Regions Has Fallen, But Has Edged Up In The North The London Rebound Continues To Buoy The Southern Housing Market Public Sector Employment Cuts Could Hurt Northern Borrowers More About Our Study Related Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 1
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions
U.K. mortgage arrears and negative equity continue to diverge regionally, according to an updated study by Standard & Poor's Ratings Services. We estimate that 3.9% of mortgage balances were in arrears in Q1 2013—only slightly higher than the 3.8% figure in Q4 2011 when we conducted our previous study. But, the proportion of arrears in northern regions remains about one percentage point higher than in the south. Relatively stronger house price growth in southern regions since 2009 also means that fewer borrowers in these areas owe more on their mortgage than the securing property is worth. The proportion of borrowers in negative equity (by balance outstanding) across all of the regions that we studied declined to 4.9% in Q1 2013 from 5.6% in Q4 2011, but the figure rose in northern regions. Almost 9% of northern borrowers are currently in negative equity, compared with less than 2% in southern regions. Overview • Mortgage arrears among a sample of loans backing U.K. prime RMBS that we rate rose slightly to 3.9% in Q1 2013 from 3.8% in Q4 2011 when we last conducted this study. • However, 4.4% of balances were in arrears in the northern regions in Q1 2013, compared with only 3.5% in the southern regions. • We estimate that the overall proportion of borrowers in negative equity (by mortgage balance outstanding) decreased to 4.9% in Q1 2013 from 5.6% 15 months earlier. • The southern regions accounted for most of this decline: The incidence of negative equity rose to 8.7% from 8.5% in the north, but fell in the south to 1.5% from 3.3%. • Employment and housing markets are still stronger in the southern regions, which partly explains these trends, in our view. • Given the buoyant London property market, and further public sector job cuts, which could disproportionately affect the north, we expect that the regional divide in mortgage risk will persist in the coming quarters.

Regional labor and housing market dynamics partly explain these developments, in our view. The substantial gap between the southern and northern unemployment rate—a strong predictor of arrears—has persisted since 2008, in part because some traditionally northern industries, including manufacturing and construction, saw significant job losses over the past few years. Meanwhile, London continues to underpin robust house price appreciation in the southern regions. We expect these trends to continue in the coming months. While northern employment has recently picked up, we note that part-time jobs account for most of this rise, unlike in the south where full-time employment growth has been strong. Government job cuts, to the tune of 1.2 million between 2011 and 2018, are also likely to hit northern regions harder, in our view. Furthermore, given increased foreign demand for "safe" property assets, we expect the capital's housing market to remain resilient in the near term. Therefore, we don't see the regional house price divide closing anytime soon.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 2
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

Northern Arrears Remain Higher Than In The South
Stable unemployment since late 2011, along with low mortgage interest rates, have helped to contain rising mortgage arrears, in our view. Total arrears in our loan sample increased only slightly to 3.9% in Q1 2013 from 3.8% in Q4 2011. However, arrears in the north remain substantially higher than in the south (see chart 1 and map 1). About 4.4% of northern mortgage balances were in arrears in Q1 2013, compared with 3.5% in southern regions. In each of our previous three analyses, the arrears gap was never below 0.7 percentage points.
Chart 1

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 3
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

The North-South Unemployment Gap Persists
Diverging regional employment partly explains this trend, in our view. While the gap in the unemployment rate between the northern and southern regions has recently declined, it has remained above one percentage point for more than four years (see chart 2). The unemployment rate is a strong predictor of arrears, in our opinion.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 4
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

Chart 2

In our view, the industry mix across the U.K. is still contributing to the regional unemployment divide. For example, the manufacturing and construction industries, which account for a higher proportion of northern employment, saw high job losses over the recent downturn. Neither has recovered substantially: Manufacturing production in April 2013 was at about the same level in real terms as it was three years earlier. The value of new construction orders has picked up in the past several months—rising 11% year-on-year in Q4 2012—but remains about two-thirds lower than the Q4 2007 figure. Meanwhile, job market indicators in the south of the U.K. remain stronger. The number of persons employed has increased by about 4% in southern regions since the end of 2009, nearly twice the figure for the north (see chart 3). Furthermore, although the U.K.'s employment market has improved modestly, part-time jobs have accounted for most gains in northern regions since 2009, while full-time employment has fallen (see chart 4).

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 5
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

Chart 3

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 6
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

Chart 4

Negative Equity In Southern Regions Has Fallen, But Has Edged Up In The North
U.K. house prices have remained stable over the past couple of years, leading to relative stability in borrowers' equity positions. In Q1 2013, the proportion of borrowers with less than 10% equity was 14.4%, on a par with the figure from two years earlier. The proportion of borrowers in negative equity was 4.9% in the quarter, compared with 5.6% in Q4 2011 and 5.0% in Q1 2011 (see chart 5). However, diverging regional house prices mean that the proportion of borrowers with low equity has continued to rise in the north, while it has fallen in southern regions (see chart 6 and map 2). The incidence of negative equity in southern regions fell to 1.5% in Q1 2013 from 3.3% in Q4 2011, with the South East leading the way (0.9%). By contrast, in northern regions, the figure edged up to 8.7% from 8.5% over the same period.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 7
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

Chart 5

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 8
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

Chart 6

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 9
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

The London Rebound Continues To Buoy The Southern Housing Market
The widening regional house price divide is mainly responsible for these trends. Between mid-2009 and Q1 2013, house prices in all regions rose by about 8%, but southern house prices rose by nearly 14% over the same period, compared with only 2% in the north (see chart 7). London is still leading the housing rebound in the south. London residential property prices rose 4.5% year-on-year in Q1 2013, against a 1% rise for all of the regions considered in our study. Southern house prices increased by 1.7% in the past 12 months—compared with a 0.4% increase in the north—but excluding London, the rise was only 0.6%.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 10
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

Chart 7

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 11
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

Chart 8

Public Sector Employment Cuts Could Hurt Northern Borrowers More
The regional employment and housing market divides may persist in the near term, in our view. In the case of housing, London property prices will not continue to rise at their current pace indefinitely, in our view, but given the capital's safe haven status, we expect that strong foreign investment will continue to support the market in the coming quarters. So far, we see no evidence that government-backed mortgage indemnity and equity loan schemes have increased the number of property transactions more in the northern regions than in the south. For example, for the NewBuy transactions completed in the 12 months to March 2013 for which regional data is available, nearly three in five were in the south. The impact of the Help To Buy initiative—an additional set of government measures to stimulate the housing market, which will take full effect in 2014—on residential property prices in general, and the regional house price divide in particular, remains to be seen. We believe that the southern employment market will remain stronger too. The Office for Budget Responsibility now expects public sector employment to contract by 1.2 million between Q1 2011 and Q1 2018—higher than the March 2012 forecast of 730 million public sector job losses over 2011-2017. Since the public sector accounts for a larger

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 12
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

proportion of northern employment, we believe that government retrenchment could disproportionately affect northern regions. Indeed, between Q1 2011 and Q3 2012, the north has accounted for about 60% of public sector job losses, a figure that is in line with the proportion of government jobs based in these regions (see chart 9). However, northern private sector employment rose by about 550,000 over the period. This is nearly double the public sector employment decline, and 60% more than the increase in southern private sector employment. However, government survey data indicate that northern full-time employment fell over the period and increased part-time employment largely accounted for the job gains. The opposite was true for the south, where full-time employment rose while part-time employment stayed flat. This suggests to us that many northern borrowers may now be employed in less stable and lower-paying roles. Therefore, despite stronger headline private sector employment growth in the north in the past two years, we believe that borrowers in these regions typically remain at more risk of mortgage arrears—especially as government fiscal retrenchment intensifies over the next several years.
Chart 9

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 13
1147850 | 301674531

Mortgage Arrears And Negative Equity Remain Higher In The U.K.'s Northern Regions

About Our Study
This study updates our earlier reports titled: • "The North Is Bearing The Brunt Of Rising U.K. Mortgage Arrears," published on April 11, 2012; • "U.K. Employment And Housing Market Dynamics Push North-South Mortgage Risk Gap Wider," published on Aug. 10, 2011; and • "U.K. Public Spending Cuts May Exacerbate North-South Divide In Mortgage Risk," published on Nov. 4, 2010. It covers about two million mortgage loans backing prime residential mortgage-backed securities (RMBS) transactions that we rate, using the most recent data from Q1 2013. Since we no longer rate some of the transactions used in previous analyses, the composition of the mortgage loan sample used in this study is different from that used in previous studies. However, RMBS transactions used in previous studies account for about 70% of the current study's loan sample balance. Therefore, we believe that the broad trends in mortgage risk are still observable. Geographically, the "north" refers to the East Midlands, West Midlands, North East, North West, Yorkshire and The Humber, Wales, and Scotland government office regions. The "south" includes East Anglia, London, the South East, and the South West. We exclude Northern Ireland because relatively few of the loans in our sample are from this region.

Related Research
• • • • • The North Is Bearing The Brunt Of Rising U.K. Mortgage Arrears, April 11, 2012 Scenario Analysis: Are U.K. Mortgage Borrowers Between A Rock And A Hard Place?, Nov. 22, 2011 U.K. Employment And Housing Market Dynamics Push North-South Mortgage Risk Gap Wider, Aug. 10, 2011 U.K. Public Spending Cuts May Exacerbate North-South Divide In Mortgage Risk, Nov. 4, 2010 U.K. Prime RMBS Index Report, published quarterly

Additional Contact: Structured Finance Europe; StructuredFinanceEurope@standardandpoors.com

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 14
1147850 | 301674531

Copyright © 2013 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

JUNE 19, 2013 15
1147850 | 301674531