It is remarkable how quickly the euphoria hitherto evident in the UK housing market is showing signs of a definite mood swing. On Apr 9th, Larry Elliott, economics editor at The Guardian was reassuring readers whilst hedging his bets under the banner Britain is not the US, so don't panic - yet, by Apr 21 the 'pink un', the UK's venerable Financial Times, an organ not known for frivolity, finally announced in the measured tones we have come to expect of it, Subprime market in UK 'has parallels with US.'
Before the bombshell of revised UK inflation expectations and the consequent fall in the dollar against the pound, Elliot was assuring his anxious readers with the Halifax, Britain's biggest lender, announcement that house price inflation had broken through the double-digit barrier for the first time in a year in March, (rising to above 11%) and that the Bank of England decided that a raise in interest rates from their current level of 5.25% was not in the cards; "get on the ladder now before that dream home becomes even less affordable," he urged.
Turns out though that the Brits have been having their own subprime party, just that true to form they haven't called it by name, ever wary of the Yankee's tendency to embarrass with straight talk. But whadda ya know; turns out that UK lenders have attracted first-time buyers with low introductory offers, there has been an increase in 'self-certification' (read liar-loans) for those with 'irregular income' (read $100,000 pa 'lawn care specialists'), and in return for a higher interest rate the usual checks aren't done on the borrower's ability to pay. Also lenders mortgages can be had at five times income and the ratio of house prices to income is higher there than in the US. Sound familiar?
I was particularly amused by Elliot's invocation of US "unscrupulous lending practices," not to be found of course among the saintly denizens of Threadneedle Street. Then there's the hoary old myth of land availability in which the US has limitless open space coupled with lax planning laws so when prices increase supply can easily be adjusted, while the UK is a small island where land availability is additionally limited by usage regulations. All this together with a favourable property tax system leads to an inefficient housing market where high demand leads to inflation rather than an increase in supply. The conclusion Elliot draws: UK house prices have an in-built tendency to rise and low quality UK loans are less likely to lead to negative equity than they would in the US. Amazingly, his argument for the strength of the UK economy appeals to the health of consumer spending, financed through, you guessed it, mortgage equity withdrawal! And so it goes.
Enter Jane Croft at the Financial Times less than (an eventful) two weeks later; ""Banks may be "taking on substantial risks" by ramping up mortgage lending to customers with patchy credit histories, the City regulator warned yesterday." It seems arrears in the UK subprime sector are 20 times those on primes. And shockingly enough, rising house prices are leading some high-debt borrowers to take on additional debt by borrowing against the resulting increase in 'equity.' Clive Briault of the UK regulatory Financial Services Authority: "For example, lenders are in some cases taking on substantial risks through a combination of high loan-to- value ratios and high income ratios, in part because borrowers are using additional borrowing against property as a means not only of debt consolidation but also of increasing their debt at regular intervals by taking as much advantage as possible of rising house prices."
On Apr 20 unmistakeable signs of a sea-change emerged with a host of lenders cancelling fixed rate deals already in the pipeline: Lenders pull fixed-rate mortgages. Is a housing market crash coming?
If it quacks like a duck.
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