UK Housing Market Continuing Down the US Path

The UK housing market (and indeed the UK economy) seem to be proceeding on the sorry path that we are on. However, forecasts are far from dire, pointing to a softening rather than a sharp fall. But gee, didn’t we see that movie here?

Update: Reader vlade chided me for perhaps creating the impression that the UK was a direct parallel to the US, when the UK has had very little subprime. However, its basic lending practices are more aggressive than those in the US, and the same bubble frenzy mentality appears to have been operative. So while the general trajectory may be the same, the downslope may not be as steep.

From Bloomberg, “U.K. Housing Market Was Worst Since 1992 in December, RICS Says“:

U.K. real-estate professionals said December was the worst month for the housing market since the aftermath of Britain’s last recession in 1992.

The number of real-estate agents and surveyors saying prices fell exceeded those reporting gains by 49.1 percentage points, the Royal Institution of Chartered Surveyors said today in London. That compares with 40.6 points the previous month. In the capital, confidence in prices fell to the lowest since 2003.

An end to the U.K.’s decade-long housing boom may threaten economic growth as falling home values discourage consumers from spending. Economists forecast the Bank of England will cut the benchmark interest rate for a second time next month after a reduction in December to guard against fallout from the collapse of the U.S. subprime mortgage market.

“The housing market is clearly feeling the pinch from the credit crunch and the round of interest rate hikes in 2007,” Ian Perry, a spokesman for RICS, said in a statement. “The Bank of England may have to cut rates further if the market is to remain in a stable condition.”

A measure of expected prices slid to minus 62 from minus 47 in November, both the lowest since RICS started collecting data on the outlook in Oct. 1998, the report showed….

Other reports have also shown a weaker property market. HBOS Plc, the country’s biggest mortgage lender, said Jan. 8 house prices fell 0.8 percent in the three months through December, the first quarterly drop since 2000. Nationwide Building Society said that values fell 0.5 percent in December….

“The housing market is in the throes of a significant correction,” said Richard McGuire, an economist at Royal Bank of Canada in London. “We don’t see a collapse, but there will be a pronounced downturn that will weigh on consumption.”…

First-time buyers had been shut out of the market as prices tripled in a decade and supply dwindled. Construction of new homes in Britain stagnated at 148,000 units a year on average between 1989 and 2005, down from a peak of 425,000 in 1968.

“Supply would have to loosen considerably before prices experience a significant dip,” Perry said. Today’s report shows stocks on the books of real estate agents rose to an average 76.9 from 71.8 the previous month.

Still, homebuyers may be further discouraged from browsing property as U.K. banks plan to make fewer loans to consumers and companies in the first quarter, according to the Bank of England’s quarterly survey on credit conditions, published this month.

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  1. vlade

    There’s a difference between UK and US housing – not that much subprime.
    That said, the love of British with their houses and willingness to borrow to the hilt to pay for overpriced shoddy housing is I think much higher than in US, and that might compensate (read, crash in speculative buy-to-let “investments”)

  2. Yves Smith


    Correct, and due to the hour, didn’t elaborate sufficiently. My impression is that the UK is in some ways similar to Oz, where anyone with a job and a pulse could get a mortgage, and much higher home payment/total income ratios are used in determining maximum mortgages than is the norm in the US (here, 40% was the absolute max in a prime loan, and 33% considered more prudent, while in Oz, 50% was the limit. I know people who had to argue with the bank to take a smaller mortgage, in part because they couldn’t live on what would be left after servicing a bigger mortgage).

    I am also under the impression that the home price/incomes ratio is at least as out of line with historical norms in the UK as in the US.

  3. AndyG

    Whilst the UK housing market might not have as much of a subprime problem, my feeling is there has been a higer level of speculative investment than the US (via by-to-let), and therefore the downside is as great, if not greater.

  4. a

    Not much subprime? The banks were giving away money, without any analysis whether the borrower could pay back. A relative of mine (in Cambridge UK) had 3 or 4 properties and wanted to buy another. The combined mortgage payments were already over 50% of income. The banks didn’t bat an eye and lent him the money.

    No England won’t follow the same trajectory. It will be worse.

  5. Brock

    Not 5 months ago I was sitting in a pub in Singapore being lectured by some drunken Brit about how the housing crises was due to “stupid Americans” and how it could never happen in the UK. He went on and on and on about real estate never going down in price and this and that. He gave me his card. It is time for an email, I reckon.

  6. vlade

    Well, there’s not that much sub-prime in UK in the classical US sense. That is, you won’t find nearly sa much NINJAs, 2/28s etc.

    That doesn’t mean the lending here was responsible though – it’s just that the adjustment’s not going to be as bad on most people’s lives as in the US (famous last words).

    What I mean by that is people most hit here will be the buy-to-let “investors” who had problems recouping cost of a mortgate from rent in the first place. Those will get nailed (and rightly so).
    Real estate will drop – maybe by as much as 20-30% – but then, look at it this way – you have to live somewhere. If you can afford to pay your mortgage payments now (at between 5-6.5%), you can probably (barring a job loss, in which case makin any mortgage payments is hard) it will hurt you psychologically, but not so much (directly) financially. You have to have a place to live, Britain just doesn’t have enough bridges :).

    Of course, the economy will slow down (you won’t have that much free cash to spend), but again – you have to live somewhere and renting isn’t extremely cheap either (as in half of what you’d be paying in mortgage. it’s probably around 85-90%, but can be more, depending on area).

    So lot’s of people who own just their own house will batter down, and not do the three overseas holidays they were used to.

    I think that we will see “foreclosure suburbs” here in the UK, but it will be buy-to-let suburbs.

    Of course, if UK gets 70s-like recession to boost, then anything’s possible.

    If you want to look at real strange housing bubble, look at New Zealand. Mortgage rates of 10% (normal, not subprime), housing appreciating (was, not anymore) at tremendous speed for last 10 years, yet the place has (mostly, with the exception of Wellington) enough land for ten times the population easily.

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