1. 11 May 2005 The Economy and the Housing Market Fionnuala Earley Group Economist Nationwide Building Society

2. Overview  Recent Trends and Outlook  Economic Background  Housing Market  Risk factors  Outlook

3.  Economic growth above trend  But questions about level of spare capacity

4.  Labour market remarkably stable  Record employment but rising unemployment  Paradox due to increased size of workforce

5. Economic Background  Energy costs have fuelled inflation  Oil prices now falling but utility bills still increasing  Inflation expectations are higher

6.  Wage growth steady  But risk that inflationary expectations will feed into wages  For now, wages are kept under control by immigration, threat of outsourcing and remaining slack in labour market.

7. Economic recovery  Retail sales picking up and outlook stable  Falling petrol prices leaves consumers with more to spend

8. Economic Summary  Economic growth above trend – despite recent revisions  Inflation well above target  Labour market resilient  Wage growth steady  Retail sales picking up BUT  Household income growth (and expectations of its future growth) slowing  No sign of second round impact on wage growth  Second interest rate rise on the horizon

9. Housing Market  Surprisingly strong and enduring revival in housing market  Activity levels picked up in spite of worsening affordability

10. Buy-to-Let a factor  Residential property investment a clear boost to the market  B2L balances increased from 1% to 8% of total mortgage balances in 5 years  House price growth has allowed existing landlords to gear up  Gross buy-to-let lending 11% of total gross lending in H2 2006

11.  Affordability – new buyers facing 3¼ times income, but this excludes those pushed out of the market  For average earner ftb would take up more than 40% take home pay  House price growth outstripping household income growth

12. Default Risks  Small upturn in arrears but remain at low levels  Financial distress concentrated in non-owner occupied sector  Lending secured on dwellings over £1 trillion  But remaining equity in owner occupied housing stock is more than twice this

13.  Housing market more resilient than anticipated  House price growth now at 8.2%  Momentum in the market grown throughout the summer  Strong investor demand – but this is not the whole story BUT  House prices growing faster than incomes  Affordability deteriorating  Expectations of house price growth moderating  Widespread expectation of further increase in rates