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U.K. Housing Could Have 20% More Downside

 April 16, 2012 09:35 AM


By Andrew Butter

Personally, I thought the bounce of house prices in UK starting April 2009 was an illusion. Three years later, they still didn't go down so I started to think I obviously got that wrong, although there is still a niggling doubt in the back of my head.

Quite recently The Economist put out a piece saying house prices in UK and in some other parts of Europe, were still too high. That's significant because although they have been wrong on a lot of things, for example the intelligence of invading Iraq in 2003, which they championed vociferously, they were right on house prices before the crash. 

Back then they had an issue with a brick on it warning of what might happen, although in retrospect they were partially wrong, what happened was much worse than they had imagined. But this time around, did Gordon Brown save the world banks, and can we all live happily ever after, or not?

This is a chart of the progression of U.K. house prices compared to U.S. prices:

I'm not talking rocket science here, just eyeballing. But even if I close one eye and squint, either U.S. house prices got unfairly hammered or perhaps something unpleasant is coming to UK house prices that the fairy-godmother-of-last-resort managed to forestall, only temporarily.

Or perhaps I'm being alarmist, it happens.

After all, there are big differences between UK and USA which is where the same model on which I based the article on UK house prices worked perfectly.

First of all, in USA they build houses, or they used to, in UK they haven't built any since Harold Wilson was caught taking kickbacks from real estate developers. Which is why dollar for dollar you can buy a five-bedroom mansion in Orlando complete with pool and a hot line to Dominoes Pizza for what it will cost you to buy a damp, energy inefficient shoebox in Neasden.

Another thing the Brits didn't do sub-prime, OK they had Northern Rock, but the mortgages are recourse, not like USA where you can just jingle-mail.

Plus most mortgages in UK are adjustable whereas in USA they are fixed; so if Fairy-Godmother pushes down interest rates, every homeowner in UK gets a break whereas in USA you got to re-finance to tap into that gravy-train, and you can't because your LTV got blown to smithereens and the mortgage providers are belatedly trying to impose rational lending standards…after the horse bolted. 

And another thing…it's a long list; most mortgages in USA were part of a pool put into a residential mortgage backed security, and they got servicers who have to follow the rules of the thing they are administering, plus the servicers personally make more money foreclosing (even if the pool doesn't). In UK the big mortgage companies have flexibility so they don't have to kick you out on the street if it doesn't suit them, and well, if they can hold the loan on their books at par by re-negotiating the re-payment part to 120-years, so long as you promise to pay your installments, that's what they will do.

On top of all that UK is a lot more hospitable to foreigners than the Americans are; for example to Russians and people whose names set off alarms at Kennedy Airport; particularly those who have suitcases full of oil-money, and other sorts of money too, all lined up so they can slap a one-time-payment on a little pad just off the Edgware Road.

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