UK house bubble bursts

Posted by Gianluca Carrera
April 17, 2008

An interesting article on this week Economist drives the attention on a few points with regard to the UK house bubble:

  1. the previous downturn lasted for almost a decade
  2. Halifax index (down 2.5% in March) is late recording the real market conditions. It registers prices when mortgages are agreed, which is a few weeks later to when prices are actually agreed between the parties. Apparently, prices are reportedly already down 10% from the peak these days
  3. it used to take 4/5 visits to sell a house, nowadays 12 or more
  4. the last house bubble extended to even more stretched levels compared to the previous one (ended in 1989). At that time, first time buyers house prices to earnings ratio was 4, now it is 5.5.
  5. house prices have surged almost 3x since the bottom in 1995
  6. about 12 to 13% of mortgages are held by borrowers with spotty credit records or with no incoms proof
  7. credit has dried up: type of mortgages went down from 9,500 in August last year to about 1,300
  8. Morgan Stanley forecasts house prices drop of 20% in real terms in the next two years
  9. property derivatives forecast house prices drop of 15% in nominal terms in the next 2 years
  10. IMF considers UK house prices to be inflated 30%

There are positive as well, of course.

  1. record employment in UK
  2. only about 4% of the mortgages will enter negative equity territory if prices fall 20%
  3. economy still doing ok-ish
  4. 2012 Olympics should support real estate

Now, it is often the case in markets that when everybody is expecting storm, sun will magically appear. Is this going to be one of these cases? I doubt it, as it usually is the case after the markets have been through storm for a while and frustration is widespread. I don’t see these two conditions now. It is also often the case that when everybody expects prices to fall, they actually do fall, as everybody wants out first. Will this be a self fulfilling prophecy?

If you want to read the whole article, please go to The Economist.

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