Investment Markets » Construction and Property
Britain's Continuing Property Boom
Fears of an American-style crash are overblown, but the UK nonetheless faces its own distinctive property crisis.
Who says London no longer jumps when the bell on Wall Street rings? The time-honoured tradition of looking to the US for direction was seldom more evident recently, than when London markets rocked and rolled on escalating worries about the US sub-prime mortgage crisis.
Sub-prime is an ugly euphemism for often extortionately priced loans taken out by poorer homeowners with low credit ratings. These accounted for 58% of mortgages taken out in the US last year, and many are proving toxic.
A combination of falling house prices and rising interest rates, have seen mortgage foreclosures hit a 37-year high, triggering what some claim as the worst economic crisis to hit the US in years. Whether or not this contagion spreads to the UK property market, we'll all feel the consequences if the doom-mongers are right that a US slump is just around the corner.
Property prices in America might be slumping, but there's little sign of a repeat performance in the UK where the resilience of the market – still rising at an annual rate of around 8% – continues to defy the sceptics.
Indeed, a crisis of an entirely different sort seems to be in train. Demand remains so high, and supply so tight, that experts claim the market is grid locked. In parts of London, 80-100 buyers are chasing every property.
Plainly, this situation cannot continue. There comes a point when prices are so high they have no way to go but down, but when will this happen? Nobody knows, but in the absence of a major economic shock, the consensus is still that a mild slowdown is the most likely outcome.
The attitude in Britain is to view the carnage in the States as a foreign story, yet the differences between the two countries aren't so great. There are sub-prime sales teams at work here too and higher interest rates and rising bills have hit homeowners hard: repossessions jumped 66% last year.
Debtors increasingly have no financial slack to draw upon – particularly the young, who are either priced out of the market, or funding a vast redistribution of wealth between the generations by paying older homeowners extortionate prices for some hutch.
From this perspective, a crash is exactly what we need, but given the vast numbers whose financial security depends on staying out of negative equity, it would clearly be a disaster.
We have allowed ourselves to become far too dependent on the property market and now face a lose-lose situation. Whether prices go up, or down, the consequences are likely to be about as sub-prime as you can imagine.
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