May 08, 2007

Think America is having a nice housing crash? Just wait, England will have one for the ages

If what goes up must come down, then England, which has much further to fall than the US, will land with a bang heard 'round the world. It's not a question of if, it's a question of when.

Get ready world for Housing Crash, Brit Style.

Here's a great column in The Observer. I especially like the point that the central bank must raise interest rates not just to fight inflation but to send a message to would-be housing speculators that yes, housing prices can and do crash. Because home prices will keep going up and up and up and up unless, like a bad doggy, someone gets a spanking.

The crash is coming and it could be soon - The Bank of England must act decisively and swiftly to curb the current house price madness

It is crazy and it defies logic. The continuous rise in house prices over the last five years has become one of the facts of British life. It divides the generations: parents often sit on hundreds of thousand of pounds of equity propped up by their children's willingness, as first-time buyers, to incur mortgage debt on a scale never before dreamt of. It has made millionaires many times over of those who have plunged into the buy-to-let market. We are obsessed by house prices.

The risk of history repeating itself is known, but too few people believe it. Not the clubs of four or five young people 'co-buying' in order to have a chance of getting into the housing market. Not the wave of buyers of flats that are bought speculatively either to be let or which just stand vacant (and which now constitute one of the prime drivers of demand). Seventy percent of the 20,000 flats built in London last year were bought by buy-to-let speculators.

Neither they, nor those who lend the money, appear to be concerned that prices will fall. Cheltenham and Gloucester has just decided that it will finance small buy-to-let borrowers to buy up to nine properties rather than the three at present. The Bank of Ireland, according to the Financial Times, has just raised the maximum it will lend to any one entrepreneur by eight times - from £2.5m to £20m. It is risk-free lending. It may be that the yield from rents is lower than the costs of borrowed money, spelling disaster, but as property prices only rise, nobody worries. It is stories like these that prove we are in a bubble.

House prices are now six times average incomes - 20 per cent higher than before the calamity of the early 1990s - and forcing ever higher amounts of mortgage and bank lending, which, in turn, push up inflation.

The bank has to act decisively on Thursday and give an unmistakeable signal of its intent. It should raise rates to 6 per cent. If it does not, it will only have to move them even higher next year because it bottled out of acting pre-emptively.

It has to break the folklore that the only direction of house prices is up.

So be cautious. Don't take out an extreme mortgage at the top of the market. Don't feel sympathy for the distress about to hit the buy-to-let market and the lenders who recklessly fed the fever. But do ask hard questions about how our financial system is managed.


Anonymous said...

Check out:

Nice summary of the crazy housing market in the UK.

Anonymous said...

It's a smaller country - doesn't that make it even worse than here?

Stuck in So Pa said...

I wonder how the British REIC spins articles like this. Keith, do they even bother, or is it the same old b.s. like what the U.S. REIC is still spitting out over here?

(The Queen really should have knighted him. Imagine, Sir Frederick Scuttle, Love It!)

Anonymous said...

And to think Gordon Brown sold off half of England's gold reserve at the market bottom. D'oh!

Anonymous said...

Why did the UK bubble start to re-inflated? I though price appreciation stopped a year or so ago.

Anonymous said...

Soccer will save the day!

Anonymous said...

House prices are now six times average incomes

Six times? That's nothing. Hawaii started out at six times *BEFORE* the bubble even started.

Anonymous said...

"Six times? That's nothing. Hawaii started out at six times *BEFORE* the bubble even started."

Six times is the nationwide average in the UK. In London (which is where most things of interest happen in the UK, and the metro area is home to about 1/6th of the population) the ratio has to be far worse.

Markus Arelius said...

Keith, do you find that when talking to Brits about the local housing market, they tend to say "bloody hell" or "fu&*ing hell!" a lot?

Just curious.

Man, I know I would.

Markus Arelius said...

Keith, I agree that the housing market in UK is pretty effed up.

But consider that in OC california, the median income is $75,000. At today's home prices, that's 10 times.


You know what that means: The US still wins the most effed up market award! Hurray!

shtove said...

This could work out differently in Britain.

1. High population density with restrictions on land use.
2. Strong European economy with plenty of immigration to Britain.
3. Strong pound sterling.
4. London is booming like a siege gun.

The Buy to Let market should take a steep tumble - at the moment I'm seeing quite a lot of them being kept vacant, with the owners relying on capital appreciation. The ones who get repossessed now and walk away with some equity may be the lucky ones.

The question is: will a B2L collapse spread to the rest of the market? Or will the US house bubble take the boom out of the European economy, so property gets hit from both ends?

BTW - thanks for the blog. As with everything else on the Internet, nobody does it half as good as the Americans.

Hard to tell.

Anonymous said...

I miss the Benny Hill show.

Anonymous said...

In my opinion, there are many forces converging into England right now, which is creating this bull real estate market:

1. Huge wave of immigrants from South America (Brazil being number one), who choose England because it's much tougher to get a American visa these days. The same trend is happening in Canada, another country easy to get in. Because most Brazilians have an European descent, they get European passports very easily. There are states in Brazil in which 80% of the population descend from Italians, Germans, and Portuguese immigrants, countries that easily issue passports to second generation descendants. Most of these people are going to England to study and work, sharing a small property between a bunch of people. Some official stats reveal that 2 million Brazilians have immigrated to England since 2000. However, most of Brazilians end up going back home after learning English, getting degrees, and saving some money to open businesses back home.

2. Another force pressuring prices is the transfer of Wall Street to London. Those guys have money to spend.

3. Lastly but not least, the freaking Eastern Europeans are swimming in money with all their crook businesses, Casey style.

I'm not sure if England's prices are coming down anytime soon, because the referred trends above are not slowing down.

Ed said...

This is the West on indolence,
complacency, self-indulgence,
sedentry, frivolity, ignorance,
kumbaya, and drugs.
.... Any questions ?

(if life is not battle,
you are losing the war)

Ben Franklin said...

Bloomberg article on the gazumping trend in the U.K.:

Turns out the U.K. is one of the least-regulated countries when it comes to real estate: there apparent is no realtor licensing....

Anonymous said...


Anonymous said...

I have all the smoked kippers. Or at least most of them. I love them. I've been eating them for years!

i am anonymous said...

>> But do ask hard questions about how our financial system is managed.

I'll ask a better question - why is our financial system "managed"? Why do we need central planners, unless this is socialism? Is this socialism?

Anonymous said...

The U.S. is going to take out the U.K. When the final collapse of the U.S. economy hits, the pin action is going to wipe out U.K. banks. It is going to be the economic tsunami from Hell.

All of those buy to let Brits. are going to be in there with their U.S. cousins. Housing will fall like a ton of bricks, and God forbid anyone under it. The banks will fail and the dollar and pound will be worthless! Get your gold and silver mates, because this blooming storm will take no prisoners. The only currency that will be worth a damn will be the Ausy and Canadian dollars.

Anonymous said...

All this dosh sloshin around sounds a bit dodgy. Time for a nice warm pint at the local. Up the Hammers. I'm forever blowin bubbles ...

Anonymous said...

"I have all the smoked kippers. Or at least most of them. I love them. I've been eating them for years!"

I had a hot Icelandic girlfriend who liked that crap. Unless you guys are talking in metaphors.

kitchenstove said...

Ah, Benny.

The Benny Hill Show theme should become the theme song for every future boom AND bust.