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Thursday, May 28, 2009

The U.K Stress Test Scenario

by Calculated Risk on 5/28/2009 11:52:00 PM

From The Times: House prices halved in FSA stress test

The key assumptions in the stress test were that the economy would shrink by 6 per cent from peak to trough with growth not returning until 2011 and trend growth not until 2012. The regulators also assumed unemployment rising to 12 per cent of the workforce, or 3.7 million people, which is 1.5 million more than the present number and would be a higher level of joblessness even than in the recession of the early 1980s.

Finally, the FSA posited a 50 per cent fall in house prices from their peak and a 60 per cent fall in commercial property prices - office blocks and shops.

So far, house prices have fallen by 19 per cent from their peak in October 2007, according to the Nationwide Building Society.
Analysts said the stress test parameters were, if anything, not severe enough. The market is already expecting a peak-to-trough fall in GDP of 4.5 per cent and unemployment peaking at 10.5 per cent, “which is not significantly better than the assumptions made,” analysts at Credit Suisse commented. However, the house price scenario did look more extreme, it added.
The U.S. more adverse scenario is for unemployment to rise to 10.4% and house prices (Case-Shiller Composite 10) to fall by almost half.

And how about a 60% decline in commercial real estate? How would that impact the S&P CMBS assumptions?