Jan 21 (The following statement was released by the rating agency)
The outlook for all major European residential mortgage markets has improved or stayed the same compared with a year ago, but performance among countries is diverging, Fitch Ratings says in a new report.
Ireland, Portugal and the UK are the markets with the most improved outlooks. However, we do have concerns about regional overheating in the UK.
The divergence in European markets reflects country-specific property cycles and factors such as government and central bank intervention.
In the UK, the economic and housing market recovery will support short-term mortgage performance, and market-wide arrears will to continue to fall. But low rates and government initiatives such as Help-to-Buy are a risk over the medium-term. Lenders are again extending high loan-to-value mortgages and the market is showing signs of regional house price inflation. We expect UK house prices to rise by 5% this year even though we believe they are already about 15% higher than is justified by income growth. A possible rate rise later this year or at some point next year remains a key risk for borrowers.
Ireland faces a crucial year thanks to increased clarity on measures to resolve distressed mortgages. We think Irish arrears will peak this year after more than five years of steep increases as existing arrears cases start being resolved and the inflow of new cases subsides due to a stabilising economy and housing market.
We expect the Bank of Portugal non-performing loan ratio on housing loans to stabilise around 2.5% in the next two years alongside a gradual recovery of employment, although performance is vulnerable to interest rate increases and high long-term unemployment.
In Greece, we think arrears will peak in 2015. Levels of new arrears have begun to shrink as the economy starts to recover. The foreclosure moratorium, extended for another year in December, may continue to have an impact on arrears, but it delays the prospect of additional supply putting pressure on house prices.
In Spain, prices will continue to fall this year, thanks to a property overhang, banks selling at deep discounts, and sales by SAREB, before troughing in 2015 as improved affordability boosts demand. We expect a further increase in the proportion of housing loans that are non-performing, following a sharp rise in 2013 on higher long-term unemployment and loss of benefits, and the Bank of Spainas requirement that some refinanced mortgages are reclassified as non-performing.
Dutch house prices should bottom out by end-2014 as consumer confidence grows, mortgage rates stay low, affordability is high, and there is greater clarity around future tax treatment of mortgage interest. However, 90-day+ RMBS arrears will increase, albeit from a relatively low starting point of 0.9%, to up to 1.5% by the end of this year. This reflects rising unemployment and the rolling off of benefits, lower earnings and servicers increasingly using forbearance. We expect new gross mortgage lending in most European countries to grow, due to the economic recovery and supporting policies. The eurozone periphery will recover from a low base and we forecast cautious growth in the Netherlands and Germany with stronger growth in the UK. Volumes in France should fall due to lower housing market and refinancing activity.
Fitchas Global Housing and Mortgage Outlook includes forecasts