We may just possibly have an explanation for how British property prices have held up so well though the crisis: fraud.
One of the puzzles of the past year is the way in which British house prices have managed to recover in value despite still being extremely expensive relative to both British earnings and historical precedent. While house prices are down a bit more than 15 percent since their peak, on the Halifax measure, they have actually risen 6.3 percent in the past year, not the best vintage in British economic history.
Even more astounding, a British house now costs 4.76 times average earnings, down from the silly 5.85 times in early 2007 but still 20 percent above a historical average which itself is inflated by two bubble periods. How, you must wonder, do these people afford those houses?
Medieval British logician William of Occam taught that when considering competing explanations for a phenomenon a good rule of thumb is to choose the simplest, a rule called Occam’s razor. In this instance the simplest explanation is mortgage income fraud.
It all begins to make sense once you look at one statistic recently released by British regulator the Financial Services Authority: even as late as the first quarter of this year 43 percent of all mortgage loans were made without proper verification of the borrower’s income.
What’s more, a survey by the FSA found that 46 percent of mortgage-holding households in Britain either had no money left or a shortfall after they had forked over mortgage payments and living costs every month.