Economist's Commentary: June 6, 2008

The British Housing Market

By Lawrence Yun, Chief Economist

I had interesting discussions with my counterparts during a recent visit to London. The summary bullet points from talks with chief economists of Department of Communities and Local Government (the U.S. equivalent of HUD) and Royal Institute of Chartered Surveying (known as RICS).

• The U.K. is just beginning to see house price declines. 
• Mortgage approvals have fallen off the cliff - with less than half of what it had been a year ago.
• There is no Fannie and Freddie equivalent in Britain so the cost of credit is high and difficult to get since the global mortgage market credit crunch.
• Home prices grew roughly twice as fast as the U.S. over the past 10 years.
• New home building has been very limited even through the boom years.
• A government surveyor is engaged in home transactions to assure the property is OK and to provide information on any impending regulation or problems regarding neighborhoods. That is, home transactions take time.
• 30-year fixed rate mortgages are very rare. Many have short-term variable rates which adjust after few years of being fixed.
•  Zero-down loans are very rare.
• Mortgages are recourse loans - meaning the lenders can go after your other assets in addition to the home if you foreclose.
• The degree to buy-to-let purchases (i.e., investor purchases to rent it out) rose in recent years, but certainly not to the degree of the U.S. investor activity during the boom years.

What do these points imply? There are negatives and positives of British market in relation to the U.S. The justifiable reasons on why the British housing market will correct more would include a bigger run-up in home prices, many variable interest rate loans, and a sharp credit tightening in the absence of government-backed loans. However, there are many justifiable reasons as why the British market may encounter only a moderate house price decline. Unlike the U.S., overbuilding and excessive supply is not an issue and mortgage underwriting standards were better and to mostly primary homeowners. More importantly, there will not be people "walking away" from their properties other than from foreclosures. Some, particularly investors, have simply turned in the keys to the lenders once home prices began to fall in the U.S. The investor suffers no financial loss other than getting hit on the credit score because of the non-recourse nature of nearly all mortgages. By contrast, the lenders will be breathing down our British counterparts' necks, as lenders will want to get every pence it is owed even if it means taking the pocket change saved for the pubs.

My prediction: the Bank of England could tighten later in the year because of flaring inflationary pressures. That move will make mortgage payments higher for homeowners. Combined with a significantly lower housing demand from the credit unavailability, house prices will come under pressure. The price declines will last until credit conditions improve. It is hard to say when that will happen given the distrust of mortgage-backed securities not backed by the likes of Fannie and Freddie. But once the credit conditions improve, the demand reaching the market could be quite sharp and the lack of supply assures a quick, sharp rebound in house prices.

Aside from these observations, the other purpose of my trip was to talk to important media outlets about NAR's data and perspective and about Brits' purchase of vacation homes in the U.S. Also, NAR plans to work with RICS to develop a proprietary statistical series.

In addition to these meetings, I had the pleasure to be the guest speaker at the Adam Smith Institute. The audience seems perplexed as to whether or not to support institutions like Fannie and Freddie and of the need for a temporary homebuyer tax credit to stimulate housing demand and the economy and to lessen the foreclosure pressure. On the one hand, the audience prefers the laisse-faire policy of hands-off approach. But they believe in property rights and like the promotion of people having a stake in society through homeownership. If you will recall, Thomas Jefferson had simply re-worked the classical British concept of basic rights of life, liberty, and property.

Despite the British obsession with tabloid newspapers, the housing market and the economy will perform fundamentally well - deep into the future because of the openness of the British society.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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