Better mortgage practices should protect the UK from a crash
Here in Manhattan you could be forgiven for forgetting that America is suffering a major housing slump. The newspapers and glossy magazines are still full of features about new luxury apartments; rents are still extortionate – even by London standards – and it is the business channels on television that talk about the sub-prime crisis.
But don’t be fooled. The real housing crash is taking place, not on Fifth Avenue, or in the smart suburbs of American cities, but further afield, in the Midwest and poorest parts of the country.
The property slump in the United States is as much a social issue as an economic one. It is one of the main distinctions between what happened here and what may happen to Britain’s strained housing market.
Nearly half of the country’s lowest-income families are at risk of homelessness because their mortgage payments or rents are too high. Many were sold their home loans by frankly dodgy mortgage brokers. Some were lured in by “teaser rates” which started off as low as 1 per cent and then ballooned to as much as 10 per cent within months. Loans were awarded to families with no income, no job and no assets – in other words no hope of ever paying them off. Other mortgages were designed as the debt grew over time, rather than reducing or stabilising. Even worse, it was black and Hispanic families who were most often targeted by those handing out dodgy loans, even when compared with white households on similar incomes.
The scare has spread, threatening the solvency of many of the country’s biggest mortgage providers and depressing house prices everywhere.
It doesn’t look as if Britain suffers from the same issues: our mortgage providers have, mostly, behaved better than their American peers, and while there is a large sub-prime sector in the UK, it doesn’t seem to have developed along ethnic lines.
The problems facing the UK housing market are more economic than social. British households are significantly more indebted than American ones. However, there has not been a crunch in the UK yet, largely for one reason: whereas many poor American families face repossession because their mortgage payments shot up suddenly, UK mortgage costs have, on the whole, risen more gradually.
This is why many experts think the slowdown here will be exactly that – a drop in house price inflation to around zero for a while rather than huge price falls. However, a shock in one part of the market can spread, causing a dive in confidence and a crash.
And, while we seem to have escaped many of the nastier practices of American mortgage sellers, it is worth remembering that these were generally only uncovered when the market started to tank. Some nasty skeletons could come tumbling out if our housing market does slump.
EdmundConway is Economics Editor of the Daily Telegraph (edmund.con[email protected] telegraph.co.uk)