you are here: Homepage > News Archive > October 2007 > 19th October >

Assetsure News 19th October 2007   Is the UK Heading for a Property Price Crash? Introduction - many economists such as the International Monetary Fund (IMF) have recently argued there is an increased risk of a slump in the UK housing market, sighting a number of macro economic factors. The question is how great are these risks and are they all identifiable?, how great will a correction be? are these factors strong enough to counter act continued long term insatiable demand for UK accommodation? The IMF estimated the price drop could be much as 40%. Second guessing the individual economic arguments for an imminent crash has become as much a black art as an economic science, particularly when ‘market confidence’ and consumer perception are factors not easily measured and understood. The main factors highlighted in the report to consider are as follows:- US Sub Prime Mortgages - the scale of the housing slump in the United States due to the credit squeeze from bad debt ‘sub prime’ mortgages has rippling effects for Financial Services organisations across the world. Most notably Northern Rock (among others UK mortgage lenders) was one organisation who gambled on borrowed money to fund organic growth to compete, and lost. The amount of money Northern Rock has had to seek from the Bank of England (the taxpayer) is now a staggering £16 billion. UK Lenders Under Pressure - the overall impact on the squeeze on UK mortgage lending is becoming obvious. A greater proportion of first time buyers (particularly with np or adverse credit ratings) have seen their recent mortgage applications rejected by lenders. Lenders have become more cautious and less wiling to use the ridiculous lending multiples seen in the last 5 years. The deals for buy to let mortgages for landlords or for people wishing to purchase second home for holiday homes (in places like Spain and France to let out), have seen the initial deposit values increase significantly lenders. The ‘no deposit’ 100% mortgage era seems to be becoming more difficult to obtain as the US credit squeeze filters down to UK investors and potential homeowners. UK Incomes Not Keeping Up With House Price Inflation – the average house in the UK is now five times the average income, as property prices have jumped 300% since then early nineties. The IMF report notes: “The largest increases in house prices relative to incomes have been experienced by France, Ireland, the Netherlands, Spain and the UK”. The double digit price growth of 2007 appears largely due to pockets of wealth in the City of London and the South East where massive city bonus’ and foreign investment in luxury property have helped to sustain the general upward average trend. However, in other less affluent areas of the UK, the trend is stable or down. Since the early nineteen nineties, house price inflation has rocketed as a result of greed and speculation, during a time of general economic stability and prosperity. Low unemployment, access to lost cost mortgage deals and the creation of buy to let mortgage products from lenders helped speculation and investment and home improvements. Ironically the MPC’s inflation target of 2.5% was managed very effectively during this time... however big companies did not provide employees with wage rises over and above the rates of general inflation, despite soaring property price inflation. Now people are worried, afraid and concerned about a possible economic downturn and property price crash, and this may be having the reverse physiological effect (compared to when greed and confidence were artificially driving prices upwards in the past). UK Interest Rate Squeeze – this month the Bank of England’s Monetary Policy Committee (MPC) voted by 9 to 1 to maintain interest rates( as opposed top reduce them) this side of Christmas. This will mean a continued squeeze on homeowners disposable incomes. In particular, people coming off low rate fixed mortgage deals organised two years ago when rates were much lower, are going to be hard hit. The Council of mortgage Lenders (CML) estimates about one million people will be affected by big jumps in their mortgage repayments coming off fixed rate deals set when rates were low. The amount of UK personal credit from personal loans and cheap credit cards is also at a record high, compounding the worsening affects of rising monthly mortgage repayments. Although the current interest rate is historically lower than the 15% shock rate of 1987 (linked to the collapse of the ERM and the run on pound), the impact of mortgage outgoings as a proportion remains worryingly similar. In addition, although the Bank of England’s main rate has not changed since July, many lenders such as Abbey National, Halifax and Bank of Scotland have increased their ‘tracker’ rates over the market rate (compared the last year), to reflect the squeeze on their profits from the credit crunch. Is It All Doom and Gloom? – the recent IMF report continues to note that the mass economic migration from countries like Poland and other eastern block neighbours continues to sustain the housing boom. At the same time, the massive shortage in affordable housing new builds of UK residential property is helping to keep prices up. The report also notes that relatively accessible mortgage lending facilities for the mass market are not so heavily linked to US style sub prime mortgages. The products relied on the purchase of adverse credit risks from multiple sources to help fund them. The UK mortgage market is more regulated and established than the US and has managed to help homeowners and investors in the past through peaks and troughs in the cost of housing. Time will tell if the doom and gloom merchants will get their way.   back to top   Copyright Assetsure Limited 2007