UK property: a pig that won’t fly

By J Saft
May 22, 2009

james-saft1- James Saft is a Reuters columnist. The opinions expressed are his own –

The pig that is British property is furiously flapping its wings, but despite signs of a recovery in prices and activity, rest assured there will be no take-off.

The country, which witnessed a property bubble that made the U.S. seem sober and sensible in comparison, has seen prices fall by about 20 percent but still faces a tough recession, rising unemployment and serious short and long term questions about the price of financing.

In the face of this, Britons seeking to sell their property last month turned again to a tactic that worked so well in the boom years: they raised prices, with property website Rightmove recording a 2.4 percent rise in asking prices in May.

“While some of the impetus behind the increase of over 5,000 pounds in average asking prices will be due to ambition or optimism, it will also be out of necessity as new sellers attempt to scrape together enough equity to move,” Miles Shipside of Rightmove said.

Just how ambitious can be seen by comparing Rightmove’s average asking price of just over 227,000 pounds with an average April selling price in the Halifax survey of 154,000 pounds.

House sellers are choosing a price that will give them enough cash not only to pay back their existing loan but stump up the 25 percent or so for their next house that banks are now requiring in order to give the best mortgage deals.

Because it is hard or prohibitively expensive to get a mortgage with a low down payment, this means that in the absence of a similarly optimistic or charitable buyer, many will be unable to sell at a price that allows them to move.

On the face of it, this is a bit surprising; after all prices more or less tripled in less than ten years, why would a fall of only 20 percent cause such a squeeze?

Firstly, because many people continued to move and kept their leverage at a constantly high level, and secondly because so many people simply borrowed their paper housing gains from the bank and, well, did something with it.

There has been some regional variation in house prices, with London falling only about 15 percent, perhaps partly explained by the fact that for foreign buyers active in the centre of the capital, the discount from the peak is closer to 40 percent in currency adjusted terms.

THE GROWTH OF THE MARGINAL SELLER

The two pieces of evidence most often cited as an indication that house prices will soon right themselves are an increase in buyer enquiries and a bottoming in mortgage approvals.
The Royal Institution of Chartered Surveyors’ monthly survey showed new buyer enquiries rose for the sixth month running and at a pace not seen since August 1999. Recent Bank of England data showed that mortgages for new house purchases rose in March and were the highest in ten months.

All well and good, but the data has to be seen in the correct context. Mortgage approvals even having climbed are still a third lower than they were a year ago and, according to consultancy Capital Economics, about half of the level that has historically been consistent with stable, much less rising, prices.

And the marginal buyer who arguably drove the bubble, the buy-to-let investor, remains remarkably quiet. The amount of money advanced by banks to buy-to-let landlords fell 78 percent in the first quarter from a year before, though a steep fall in interest rates has perhaps meant fewer have thus far been forced sellers.

Forced sellers ultimately will end the standoff between asking and selling prices, and in the old fashioned way, as a lousy economy and the unemployment it breeds bring a wave of properties on to the market in the second half of this year and in 2010.

And while mortgage interest rates may seem low, courtesy of a 50 basis point base rate from the Bank of England, the typical spread above that on offer to new and existing borrowers is about 350 basis points, according to Capital Economics. That is a function of the risk of the loans, the capital of the banks and the supply of savings, and cannot be counted on to improve markedly soon.
This brings us to two crucial differences between the U.S. and UK markets, both of which make the UK a worse bet for potential buyers.

Unlike in most U.S. states mortgage lenders have recourse to the rest of borrowers’ assets. There is no walk away and post the bank the keys option, at least if you care about your car and retirement fund.

More importantly, British borrowers almost always bear some or all of the interest rate risk. There is no government subsidized fixed rate market there, unlike in the U.S.

That means if inflation, and with them mortgage rates, rise buyers will feel the shock.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.

(Editing by David Evans)

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