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Lloyds “most exposed” to future house price falls, says Morgan Stanley

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  • 01/06/2011
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Lloyds “most exposed” to future house price falls, says Morgan Stanley
Lloyds Banking Group is the “most exposed bank” to falling UK house prices, which could drop a further 10% by the end of 2012, Morgan Stanley has forecasted.

The investment bank also said that it expects the Bank of England to raise rates 150bp by the end of next year.

Analysts for the bank have warned that the UK housing market will see bigger falls in house prices.

“Our central case is that UK house prices will be 10% below Q4 2010 levels by the end of 2012. We’ll see a 3% drop by Q4 2010 and a 7% drop in 2012.”

The bank also said that Lloyds would stand to lose the most if house prices trended downwards. “Of the listed UK banks, Lloyds seems the most exposed and falling house prices may trigger higher loss given default as collateral values are lower.

“The house price falls may also increase capital requirements as modeling changes increase the risk weighting of UK mortgage assets.”

Morgan Stanley added that Lloyds loan book is 58% mortgages and forecasts that 27% of it will be in negative equity by December 2012.

A Lloyds spokesman added: “At -2% this year and +2% next year, our forecasts are broadly in line with consensus. By their own admission Morgan Stanley have a significantly sub-consensus view, most notably in 2012 where they forecast a 7% downgrade in house prices.

“While the Morgan Stanley analysis is interesting, it takes a very negative view of the economy and based on our forecast and the market consensus, one which we and the market in general consider unlikely.”

Morgan Stanley also reported that the prospect of a 10% drop in house prices will not be enough to dissuade the Monetary Policy Committee from raising rates.

“The BoE has sounded somewhat sceptical on the size of the effects of house price movements on the rest of the economy. If inflation remains above target, if wage growth and inflation expectations pick up as we expect and if the economy continues to recover, we do not think that the prospect of a house price correction would deter the BoE from raising rates.”

 

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