Archive for February, 2009

Why US and UK housing markets are not the same

Posted by robin in Financial Articles Market Commentary Wednesday February 11, 2009 7:11 pm

The UK economy often appears a mini US but not always.

Take the housing market…please, someone take it. No, but seriously, both got horribly overvalued now both slump.

Similar trajectories. Different dynamics.

According to recent reports there are 19m empty homes and rising in the US, a country of 300m souls and 9.1m sq km of land.

In the UK, there are under 1m empty homes in a country of 60m people and 241,000km of land.

On these comparatives the US, with five times the population and almost 38 times the space of the UK, has more than four times the number of vacant homes per head of the population. But with all that land there’s more room to spread out and who wants a second-hand home when new ones are available?

By volume of sales, the US expects 5m sales this year. At that rate, the backlog of vacant properties will take up to four years to clear. Annual home sales in the UK, in contrast, have been between 1m and 1.3m since New Labour came to power in 1997 but sank to around 0.6m in 2008. Assuming a volume recovery to around 1m sales per year, that’s about a year’s backlog.  

Let’s not forget, of course, the government target set out in 2007 to build 3m new homes by 2020. A goal that’s falling ever further behind as the recession lays waste to the building sector. Still no one’s going to notice for a while save for the likes of lobby group the Town & Country Planning Association. Their report in September 2008 warns of “continued escalation in newly forming households at a time when the house building industry is unable to match demand due to the credit crunch”.

It continues: “The gap between the homes we need and the house available is forecast to become increasingly stark with overcorwding the only option for many who are unable to obtain mortgages. Even when credit conditions improve and mortgages again become available the current undersupply of additional homes, will quickly risk a return to house proces spirallling beyond people’s reach.”

They conclude the 3m slated for 2020 is likely to fall “significantly short of requirements.”

 Turning to mortgage debt levels, in the US 9m homes are in negative equity. The comparative for the UK, is an estimated 1.2m homes where mortgages exceed home value. Of course, both continue rising while prices continue falling. Again on a per capita basis the UK is about a third lower per head.

 Then there’s the issue of recourse loans. In the UK all mortgages are recourse loans, meaning if you get repossessed and the lender doesn’t recover its cash from the property sale it can come after you for the difference.

Not so the US. Non-recourse mortgages operate in 27 states including California and Florida. Homeowners in those states need only hand the keys in on their properties and that’s the end of it. If their mortgage is worth more than their home (negative equity) that is the lender’s problem NOT the homeowner’s. Posting keys back to lenders has become so widespread in the US, they’ve given it a name: ”jingle mail”.

In the UK mortgage arrears are rising as people struggle to avoid being swallowed up by debt. In the US they can just walk away. 

In the mortgage market, US subprime almost quadrupled between 2001 and 2006. It accounted for 5.6% of the $3trn US mortgage market in 2001 and 20% in 2006. Along the way lending standards dissipated and the system got corrupted to the point of granting infamous” Ninja” loans to applicants - No income, no job, no assets. Many subprime mortgages enticed the unwary with low-start teaser rates which expire after a period when the true interest cost kicks in. So called Adjustable Rate Mortgages or ARMs have $96bn worth of higher rate interest payment resets kicking in in the next two years.  

Subprime makes up around 8% of the UK market. Lending was loose in terms of loan to value (over 100% was possible) and income but in general it appears standards did not disintegrate to such extremes. Most UK subprime debt was issued on fixed rates with a view at least taken on the sustainability of servicing the debt.

Adding all this together, the UK is not a US poodle in the housing market too. Fewer empty properties, fewer in negative equity and UK recourse against US non-recourse loans. Then there’s the gaping issue of the relative scale. The US is a vastly bigger country. Here in the UK, suitable space is in short supply and tightly rationed by planning laws. When the credit crunch storm finally passes we’ll face again an old problem: lack of supply.

All told, UK house prices were crazy but they’re underpinned by more than the easy credit.