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)

Comments

I dont know where you got the idea that USA borrowers are protected.In every single case I have experienced A law suit follows most lenders predatory lending is rife. With no government assistance if you cannot pay you lose your home and any credit rating making it impossible to borrow for your next home. Bankruptcy is only a single time option thanks to Conservative George W Bush plus if you have credit card debt he passed new legislation in his first disasterous term allowing Credit Card companies to charge very high usuary rates which you are now seeing in UK 39.9% I saw advertised only yesterday.Your comparison to USA property values is not correct either because house values in Florida moved up 350% in 7 years. Much like the good old 70s in UK when values doubled in 7 months.The answer to the million dollar question of how to solve this was answered for me by a sage Post Office clerk who saidand I quote.”Pay off everyones mortgage instead of handing out loads of cash to the bankers that caused all the problems.”Simple easy effective but how do governments control the people if they are not in debt anymore Perhaps you can answer that thorny question.

Posted by george lucas | Report as abusive
 

It seems a little strange to me that we are looking for an upward movement in house prices when one of the problems bringing about the current recession was runaway inflation in house prices.

Posted by John Collins | Report as abusive
 

It’s pretty shocking how many vested interests are allowed airtime in order to keep that pig’s wings flying.Houss are way too overpriced. Cheap houses would benefit everyone in the UK, as would cheap rents.Without cheaper rents the population remains immobile which makes “getting on their bike” to look for work much more difficult.The government is encouraging the debt addicted junkie population to take on more debt by pushing their own banks to lend more.

 

I agree with what should be the outcome for 2009-2010 prices but I am starting to see houses selling at the inflated prices.Also considering that Lloyds has now got a product that lets you borrow 95% and most of the other banks are now offering 85-90% products, it will not be long before all are 95% and we start to see 99.99% too, as we will never see 100% mortgages again apparently!

Posted by shintekk | Report as abusive
 

A possible statistic on where those optimistic buyers might come from was on the BBC’s Working Lunch today. Apparently 30% of house purchase are now made by cash buyers, up from a long term average of less than 10%. I suspect these are people who have been reading the more optimistic columnists and are now trying to catch a falling knife. In which case the optimism may not last long….

Posted by Ian Kemmish | Report as abusive
 

I find it hard to believe that there are many people who cant move because they have little or no equity left. How could a fall of around 20 per cent eaten into huge gains in property over recent years. I think is more to do with people not wanting to let go of their winnings. I cant see these sellers holding out for much longer.

 

Made me laugh out loud, excellent article.Perhaps now that the MPs have made their money, the housing market will be allowed to quietly die, to the historic 3*salary. The rules have changed and its a long way down, see you in 2012.

Posted by john martin | Report as abusive
 

@ George LucasYou’re incorrect: Many US states are ‘non-recourse’ which means you default, drop the keys off at the bank and walk away. That assumes you’ve been entirely truthful on your mortgage application.Secondly, Florida home values rose 350% from a very low base. The average UK home peaked at GBP 200K depending upon which index you follow. The average US home peaked at about GBP 120K.Finally, what kind of business is it to take money from people who earn it (salaried workers) and give it to those who didn’t earn it to pay of their mortgage? I agree that it shouldn’t go to bankers but your suggestion is equally preposterous.I’m constantly agog at the mental gymnastics people insist upon performing in defense of really high home prices. Would you be equally supportive of rising food or fuel prices? Clothing? Because believe me, all housing should be is another consumable which supports your standard of living – it should not be a cross borne as a result of a ‘financially engineered’ economy which enriches few and puts many on a hamster wheel for life in order to pay off their debts.Cheers, Haggis

Posted by Haggis | Report as abusive
 

I think the Lloyds “95% mortgage” requires a third party to put up a 20% cash deposit which the lender can take if the value of the house falls and the borrower defaults. In other words, it is a 75% mortgage in drag and an ugly attempt by a government-controlled bank to pretend to be helping. Do not fall for it !

Posted by john | Report as abusive
 

What I see in the UK property market is a market that has been massively manipulated by a wide range of people from banks to real estate agents to television programs to the former Prime Minister (remember his frequent property deals in the news?). There is nothing organic in the growth in this market. It’s on steroids and there is a probability that steroids while having an impressive short-term effect probably won’t have a very good long-term outcome.

Posted by Peter H | Report as abusive
 

that is correct for lloyds 95% mortgage but not for Yorkshire bank who are doing a 95% mortgage fixed at 6% for 2 years

Posted by Shintekk | Report as abusive
 
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