The FINANCIAL — London-05 September 2011: Fitch Ratings has developed a model for the UK that determines sustainable house prices given certain key economic indicators.
The agency believes that the estimation of sustainable house prices based on macro-economic variables is a useful tool to benchmark expected and stressed house prices.
This follows a similar exercise in the US, whereby a sustainable house price model was incorporated into the default rate and loss severity determination in Fitch's US residential mortgage loss criteria.
"The UK model is based on three main macro variables. These are used to determine a real house price level that appears sustainable compared to the experience during the 1990s," explains Atanasios Mitropoulos, Senior Director in Fitch's Structured Finance team.
"The model is deliberately kept simple to provide a transparent and intuitive benchmark. It is not a predictive tool," adds Ketan Thaker, Senior Director and Head of UK RMBS at Fitch. "Our current expectation for nominal house price declines is at around 10% rather than the model-implied gap of 15% to sustainable levels after taking account of three years of inflation. Fitch additionally takes into account economic prospects such as GDP growth, credit availability, the low interest rate environment and continued limited housing supply, among others."
This model is aimed at supporting Fitch's residential mortgage criteria development process. The scope of the UK model is currently limited by data constraints as regional data only reach back to 1991. However, the agency believes that its calibrated sustainable house prices are a useful tool to compare expectations and stresses against an intuitive and stable long-term indicator of average real house prices.
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