Bet­ter mort­gage prac­tices should pro­tect the UK from a crash

The Daily Telegraph - Property - - Cover Story - Ed­mund Con­way

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)

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