The report looks into a number of key issues for the housing market and what Boulger believes 2011 will have in store for the housing market, the mortgage market, and a number of other housing related issues.
Economic Overview
The biggest driver of the recovery in the UK's GDP taking us out of recession in 2010 was the construction sector. Unfortunately, this sector now looks like going into reverse, with housing starts in the year to Sept 2010 having fallen to a post war low of 102,000 and the amount of commercial development also falling.
The fact that in the US the Fed felt it necessary to announce a second round of Quantitive Easing two months ago suggests that the US economy is far from out of the woods yet. The Fed is currently very focussed on the jobs market when setting interest rate policy and earlier this month Fed Chairman, Ben Bernanke, told the Senate Budget Committee that at the pace of improvement forecast by the Fed "it could take four or five more years for the job market to normalize fully."
It would therefore be unwise to expect much help for our economy from an improving situation in the U S.
The state of the US housing market is likely to continue being a drag on its economy for quite a while yet. The latest figures from CoreLogic Inc show that at 30th September 2010 10.8m homes in the US, i.e. 22.5% of homes with mortgages, are in negative equity with the worst state, Nevada, having 67% in negative equity and even the best state, Oklahoma, having 6%.
This is one key reason why the US economy will struggle for a long time, despite the tax stimulus announced in early December by Obama to try boosting his re-election prospects. Although this has boosted his ratings, and may help his re-election prospects, it is also proving counter productive for the housing market, at least in the short term, because it has helped push Treasury Bond yields, and hence US mortgage rates, sharply higher.
We have enough information on the Comprehensive Spending Review and tax increases already announced for 2011 to make a realistic assessment of their combined likely impact on the UK economy, but it is much more difficult to assess the fallout for the UK from the rapidly escalating Eurozone crisis.
The efforts of many senior politicians of all three of our major parties who very publicly demonstrated their economic incompetence by trying to take the UK into the Euro were fortunately thwarted, partly by the proponents of this dangerous experiment being forced for electoral survival to commit to a referendum before taking us in.
In a very short list of successes as Chancellor, Gordon Brown's major achievement was concocting a series of 5 tests which had to be met before we joined the Euro, knowing full well that in reality these tests would never be met, but would keep Tony Blair at bay in his misplaced enthusiasm to join the Euro.
The major structural problems in the Eurozone have the potential to be very damaging for our export prospects in 2011 and beyond. 50% of our exports go to Eurozone countries and so economic problems in that area are a major concern for the UK.
When the EU politicians are eventually forced by the markets to admit the absurdity of a single currency without fiscal integration, the severe short term pain which will result will adversely affect the UK as well as the Eurozone countries.
It is clear that the German public is very sensibly not prepared to write a blank cheque to bail out the more profligate members of the Eurozone and it is equally clear that, whatever the politicians want, few, if any, Eurozone countries would vote for fiscal integration. Thus it is hard to see how the circle can be squared.
However just as White Wednesday, 16th September 1992, when the UK escaped from the ERM, marked the start of a long period of economic recovery for the UK, the longer term consequences of a Euro break up, or partial break-up, for the weaker countries will undoubtedly be beneficial for them. But getting there will be extremely painful, although it is worth noting that, without the constraint of the single currency, Iceland's economy is already showing signs of improvement after a substantial devaluation.
The above factors suggest that the UK economy will only recover slowly, and that it is still too early to rule out a double dip. As a result, despite increasing concern about inflation, highlighted by year on year CPI increasing to 3.7% in December, low interest rates will be needed for an extended period, not only to support the economy but also to continue helping to re-capitalise our banks.
This latter factor will become even more important if the banks have to make further large scale write offs as a result of lending to the weaker Euro countries, both in terms of sovereign and corporate debt. The further the Euro contagion spreads the longer UK interest rates will have to remain exceptionally low.
With the debt contagion having now even spread to the country in which the EU has its headquarters the situation is becoming increasingly untenable, despite the "head in the sand" attitude of some politicians.
Interest Rate Outlook
It would not be surprising if Bank Rate remains at 0.5% throughout 2011, although a small rise to 1% in the second half of the year is more likely.
The recent increases in the cost of many commodities, including oil and other fuels, will drive inflation even higher in the short term but the VAT increase from 4 January 2011 will in itself be largely neutral because the 2.5% increase to 20% is only a marginally larger increase than the 2.5% increase to 17.5% on 1 Jan 2010, which now falls out of the year on year calculation.
However, subject to any further VAT increase we can expect the inflation rate to fall sharply i
