The timebomb under Britain’s property market

The British housing market has suffered a very unsatisfying sort of crash.

Depending on which set of data you use, house prices for Britain as a whole are down by around 10-20% on the peak in 2007.

But a lot depends on where you live. Certain parts of London are now more expensive than they were back then. And other parts of Britain are significantly cheaper.

House price falls aren’t great news for those who were living in those properties, of course. But prices haven’t dropped far enough to satisfy the bears either. Combined with tight credit, prices remain far too high for your average first-time buyer.

Will that change in 2012? A report from S&P suggests that it could – and that prices could fall further…

The north of England is facing a bigger squeeze than the south

You might have thought, that around four years on from the credit crunch, the UK property market would be getting healthier. According to credit rating agency S&P, you’d be wrong.

In the last quarter of 2011, 5.6% of borrowers were in negative equity. In other words, the loans on their homes were worth more than the properties themselves. That’s deteriorated since the second quarter of 2010, when only 3.6% of homes were in negative equity.

As the FT points out, the figure is far worse in the north of England, where 8.5% – not far off one in ten – homeowners is in negative equity.

What does this mean? To S&P, it means that homeowners could come under a lot more pressure in 2012.

Falling home equity is “a statistically significant predictor of arrears and defaults”. In other words, the more over-leveraged people become, the more likely it is that they won’t be able to pay their mortgage.

The problem isn’t negative equity as such. As long as you can keep making your monthly payments, it doesn’t really matter what the theoretical paper value of your home is.

The real problem is that when homeowners have little or no equity in their homes, this “tends to limit their ability to refinance, or to sell the securing property, to clear the [home loan]”, says S&P.

That’s because if your loan-to-value is high (or above 100%, as someone in negative equity would be), then banks don’t want to lend you any money. So you end up being stuck on your lender’s standard variable rate at best. And as we all know, these have been rising recently.

That’s bad news, because the proportion of loans “worth 90% or more of the value of the property” rose to 16.6% from 13.5% in 2010’s second quarter. As a result, “more borrowers could therefore come under financial stress in 2012”, particularly if unemployment picks up.

The interest-only timebomb

Worse still for squeezed homeowners, it looks as though rates – which have supported troubled borrowers so far – are going higher.

Unquestionably, the main thing that has propped the housing market up is the Bank of England’s interest-rate slashing. That’s what has kept repossessions relatively low during this housing downturn. Repossessions peaked at 48,300 per year in 2009, a far cry from the 75,000 seen in 1991, during the last crash.

But even though the Bank has kept its rate at 0.5% for more than three years now, lenders don’t seem to be planning a similar freeze in their rates.

According to, the average rate for a two-year fixed-rate mortgage fell to a low of 3.82% in October 2011. Now it’s gone up to 4.15%. That’s not a huge jump, but as we’ve noted before, it’s the direction that matters.

It’s also worth remembering that there are a lot of homeowners out there who are extremely vulnerable to any sort of rise in rates. More than a third of home loans outstanding in the UK are written on an interest-only basis.

Some of those – a minority, I’d wager – have a sensible plan backing them to repay the capital. But an awful lot of them won’t. At the peak of the market, interest-only loans accounted for about one in every three new home loans.

Martin Wheatley of the Financial Services Authority recently described this as a “ticking timebomb”. It’s a pretty punchy description for a regulator, but it doesn’t seem far wrong.

Why were those people taking out such loans? Probably because they couldn’t afford the payments on a traditional repayment loan. In other words, they overstretched themselves at the peak of the market, and will now be stuffed if the cost of the loan rises significantly.

Trouble is, it’s now becoming increasingly difficult to get hold of interest-only loans. Most banks have changed their criteria so that you need huge amounts of equity in your home before they’ll consider lending to you on this basis.

So the people who took out interest-only loans at the top of the market are in real trouble. They couldn’t afford the home in the first place. That’s why they went for interest-only. Now it’s probably worth less than they paid for it.

Meanwhile, home loan costs are ticking higher, and they don’t have enough equity in their homes to qualify for any decent deals. As the Financial Services Authority puts it, they are ‘mortgage prisoners’. So one way or another, they are facing rising monthly payments.

For all that banks and lenders make comforting noises and say that they’re alert to the needs of their customers, the fact is that they’ll offload as many troubled borrowers as their balance sheets will allow. And that could lead to a further slide in prices.

This threat of another drop in house prices is one reason why I’m still very wary of the banking sector, particularly our state-owned banks, Lloyds and RBS. As for the property market – buying a property to live in is a personal decision, and about more than just money. But if you’re looking to invest, we think the US is a better bet just now.

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  • Hussain

    MM have often been criticised for thier stance on UK property. Here in London the property boom is on going at slower rate. As lenders have made credit very tight and recently many sellers have had to reduce their asking price, then maybe the London prices will decline like the rest of UK.

  • dr ray

    Come on Boris Mcdonut.
    Tell us why we are all idiots for not putting ourselves in debt for the rest of our lives to buy a converted outdoor privy.

  • Robert Birkett

    Will that change in 2012? A report from S&P suggests that it could – and that prices could fall further…
    I do hate the word could in opinion pieces; anything could happen – pigs could fly! Get off the fence!

    When you say London, you mean prime London. Be accurate!

    Sorry for being so anal, but such loose language makes all these comments meaningless or wrong.

    The problem with UK housing market is that demand (the amount of money people have to pay for what they want) has collapsed. But supply (the amount of sellers willing to sell at this lower demand ADDED TO repossessions) has also crashed. So we have a zombie market. Sellers demand the boom prices of 2006-7; buyers (outside Prime London) do not have the money – and won’t be getting it any time soon.
    The real problem was the ludicrous lending and borrowing in 2002-7, based on the risible belief in self-regulating markets. But here, we are…

  • dr ray

    I do agree about using “could” in an opinion. Moneyweek are past masters at this. Not so bad on the online parts but the magazine would one week have an article about why gold or houses or the baltic index could rise in value and the following week another article suggesting they could fall. Whatever the price did there would then be another article claiming they had predicted it correctly!

  • Roberto Birquet

    In the last quarter of 2011, 5.6% of borrowers were in negative equity. That’s deteriorated since the second quarter of 2010, when only 3.6% of homes were in negative equity.
    S&P are presumably basing their stats on official prices, which are in turn based on seriously low volumes. And it is fair to assume that on same volume level sales, prices would be lower: logic…if people were forced to sell to the highest bidder, rather than pretend the market prices is higher than anyone is bidding, then the clearing price would almost certainly be lower.
    Bailing out the banks has meant also bailing out borrowers; and that has meant creating a near-dead market, in which the price stats are almost meaningless. Banks are not repossessing because they do not want to accept lower-prices on their balance sheets; and are allowed to do so by the taxpayer guarantee on their businesses…and so we wait patiently for inflation to sort this out …slowly…

  • Jim

    Before 2008 buyers could get mortgages by declaring what they earned without offering proof.

    Would this be having an adverse affect?

  • DP – London


    I recently encountered a painter & decorator I employed a few years back and asked him if he was thinking of moving house. He replied, “no, I can’t get one of those self cert mortgages any more”.

    He obviously could not get a conventional mortgage, if he could only go self cert maybe his accounts for the tax man were not “correct”.

    But I’m not going there.


  • Segedunum

    I’ve always maintained that the real crash will come when people stop being able to afford their mortgages.

    Roberto: Yes, I think inflation will end up having to sort this out, but alas, I do not believe it will be done slowly. It will come upon us all of a sudden. Whereas we should have had our crash by now and been coming out the other side the cash printing for banks and infeasibly low base rates have skewed things. It just means the crash to come will be bigger than it otherwise would have been.

    Put simply, once inflation takes any kind of real hold, and it is really starting to, rates will simply have to rise and that will not be pleasant for the property market. Most people who have bought property over the past decade have no breathing room at all for an increase in their mortgage payments.

    The people who will make money out of this are people who have properties to rent for those who will be out of a home in the coming years.

  • Alec

    The artificial housing market continues, propped up by savers who have been denied a proper return on their savings in order that reckless borrowers can enjoy totally uneconomic low interest rates on their mortgages. As far as the prime London market is concerned, the so-called boom is nothing more than individuals and companies from the Euro countries parking their money in a perceived safe haven as well as the usual money laundering from elsewhere in the world.

  • Jonathan

    It’s always the case in recessions, there is a flight to quality (both lenders, to financially secure individuals, and purchasers to better quality areas i.e. South East rather than regions, Prime Central london rather than east end of London etc etc). We are just seeing this pattern play out (and over the next few years). By the time the next boom comes in several years time, these ‘worse’ areas will outperform the better ones as the situation reverses.

  • Boris MacDonut

    #2 dr ray.Usual oddness from the good doctor. When did I advocate massive debt for all? How flattering of you to try and anticipate me though, well done, but do try formulating some thoughts of your own.
    #8 Segedunum. We are far more likely to see deflation than inflation in the short term,but inflation will be nedded to help the debts disappear.
    Should we be concerned at 5.6% of mortgages being in neg’ equity? That is not arrears as such and only represents 625,000 out of 25 million homes. 1 in 40 for the hard of learning.

  • Realist, Cambridge

    I’m afraid it is the ‘same old, same old’. Every few months or so MW comes up with an article saying why prices will fall, but nothing seems to materialise. Prices in this area are still about the same as 2007. I thought a crash would of happened by now, but unless interest rates start going up, I can’t see house prices doing anything but stagnating. In this area of the Country you wouldn’t believe that there is a recession on, there doesn’t appear to be any shortage of money at all.
    Sorry MW, I am going to take this article with a pinch of salt, as much as I would like the market to fall, I’ve heard it too many times before and I’m running out of patience.

  • Critic Al Rick

    Why do some commentators consider that inflation will erode the relative value of Debt (i.e. have a ‘good’ effect on Debt); that is, this time around?

    This time around, in my view, inflation is working to the detriment of Deficits (Budget and Balance of Payments). Increase the Budget Deficit and you offset whatever ‘good’ effect inflation has had on National Debt. Increase the Balance of Payments Deficit and you offset whatever ‘good’ effect inflation has had on the rate at which wealth is vacating the country.

    By analogy, this time around inflation is working to the detriment of Mortgage Debt. The decrease in real wages is offsetting the ‘good’ effect of inflation.

    Unfortunately, this time around we’re heading for a major catastrophe from which nobody is likely to be a winner.

  • jo

    #8. Segedunum;
    “Put simply, once inflation takes any kind of real hold, and it is really starting to, rates will simply have to rise “

    Who says that rates will rise? Knowing the criminals in charge, they will fleece every penny from savers with inflation….as they are already doing. The “rules” have been thrown out the window.

    What amazes me is why all the richer people aren’t complaining and what are they doing with their money to escape????

    #11. Boris MacDonut
    It makes more sense to destroy savings with inflation before withdrawing QE and causing deflation. In deflation cash is king. First devalue cash before it is king, so everyone will end up poor except the super rich. Its a way of widening the rich poor gap and funnelling money to the top.

  • The Watcher

    @ Boris MacDonut – 5.6% is not 1 in 40, it is less than 1 in 20.
    I think you may need to check the yields on your BTL’s if this is the state of your maths ..

  • Boris MacDonut

    #15 The Watcher. The maths is 5.6% of 11.2 million mortgages is 625,000 mortgaged homes. There are a total of 25.4 million homes in the UK. So they represent 2.4% of all homes. Which is in fact 1 in 41. But I was trying to keep it simple.

  • NeutronWarp9

    12 – ‘Realist, Cambridge’ should perhaps read ‘Oblivious, Cambridge’?
    So, the housing market has remained stable for all of 5 years or so in the Cambridge area – practically a life time, then. There doesn’t seem to be a recession at all? For some, I am sure that will always be the case, but many card tarts are relying upon plastic fantastic.
    Unless interest rates start to go up? Surely you are not serious R,C? Record low interest rates and you doubt that they will change. Of course rates will rise, and once it starts I expect the trend will continue for quite a while.
    Maybe deflation will enter the room at some stage – I have no idea, but it is clear that the government is running out of steam and credible ideas – hence the debacle in the series of changes to taxation. It looks like shear desperation to me.
    You have heard it too many times before R,C and have begun to run out of patience. They say the same thing in Pompei.

  • Segedunum

    “Who says that rates will rise?”

    Oh rates will ‘eventually’ rise……….and have no effect because it will all be too late.

    It’s all a bit doomsday, but such are the ‘people’ running our economy.

  • Roberto Birquet

    5.6% of 11.2 million mortgages.
    But that’s based on assumed prices. The story of the crash this time around – apart from government efforts to save banks and borrowers, and destroy savers – is the crash in volumes. Only 30,000 mortgages a month means we barely know what market clearing prices are.
    Volumes always fall in a bust. When there is a credit binge, buyers bid higher and sellers are happy to accept: prices rise.
    When there is a credit crunch, buyers are only able to bid lower, and sellers are not happy, so do not to sell and volumes drop. But repossessions take up the slack from sellers – and prices fall further.
    The last bust saw volumes fall from 90,000 to 60,000 a month. But this time, the fall is from 110,000 to under 40,000, because of lower repossessions – despite MORE distressed cases.
    Taxpayers are bailing out banks, who refuse to repossess – for sake of balance sheet – which is why there’s yet less money for business loans – and a longer recession.

  • simpleton

    14# Jo – if inflation takes any firm hold the BoE will have no choice but to raise interest rates. If it doesn’t the city will just exit the pound en masse ergo making the inflation problem even worse, etc. I ditched most of my pounds some time ago.
    The richer aren’t complaining as they mainly hold their wealth in assets not currency. The BoE is destroying the pound, not the intrinsic worth of an asset. It is the poorer in society who are being raped – if they have savings at all it is likely to be in cash.

  • lyrec

    Prime London property (kensington etc) is still thriving due to cash from overseas buyers and wealthy city workers. This is driving more modest earners (but still affluent) in to the suburbs and commuter towns . This keeps prices in london and the south east high. Low supply also because any sensible person is terrified of the moving up the ladder and taking on absurd levels of debt unless they work within the square mile receiving big bonuses. Unless we see another major collapse in the banking sector this is likely to continue. As governments have worked out that they can print money to keep the casino going another crisis is unlikely. In the very long term we may have inflation which Governments will embrace as it will decrease their debt levels but not ours. Either way if you are not in the above club ( either Government or City Gent ) and not already on the housing ladder you may have a very long wait for a housing crash. Why , because it is a fixed race!

  • jo

    #20. simpleton

    Thanks for opening up a new view for me. Explains a lot but don’t know if its encouraging or not though.

    Tend to agree with #21. lyrec

  • dr ray

    The group really being squeezed are the successful professionals on PAYE . You don’t hear much about them because the public have little sympathy for someone with an income of £100-150K but these are the people the government is targeting with marginal rates of tax of over 60%, loss of universal benefits, increased pension contributions and increase childrens tuition fees in many cases. They can look forward to supporting themselves in old age and by then I expect the NHS will be means tested.
    These people can’t put their money in timber or farms because they will need it to pay for their parents and there own care home fees.
    Like the bank robber replied when asked why he robbed banks – the government are after these people because “its where the money is”

  • Realist, Cambridge

    17, NeutronWarp9.
    I didn’t say that interest wouldn’t go up, I said that house prices will stagnate unless interest rates go up and even then they will have to go up a fair amount to make much difference. I can’t see that rates are going to go up anytime soon, anyway. The article doesn’t mention base rates, only other factors are given and in my opinion I don’t think these will make much difference.
    Yes I know that five years isn’t a long time, but MW writes these articles as if they are going to take place fairly soon. If there is no time scale then anyone could predict the future. If I was to tell you to buy a house now because in 20 years time the value would have gone up, I wouldn’t get much credibility would I?

  • Boris MacDonut

    #24 Realist . House prices are up ten fold since 1979. You can read whatever you like into that but it means even if they only rise at a quarter of previous rates the average house will add £820 a month for the next generation (30 years).
    #19 The volume argument is irrelevant. Most decent surveys are happy with 1500 respondents. Funnily enough artworks are very expensive partly because so few come to market. Get a Magritte.

  • Ellen

    Residential property, be it bought or rented, has to relate to earning if the people who live in them work for a living. This makes it different from other asset classes. Averages residential property prices bear no relationship to earnings. But the UK are not the only country who over price their homes and can’t sell them. It looks to be a global phenonemum, with lots of global talk about ‘finding the floor”. My guess is that a lot of people advertising their property are not serious sellers. They know prices are going down but they pitch high, looking for a sucker. Alas, not enough suckers with money so we have lots of overpriced houses not selling.

  • dr ray

    Interesting statistic. Not quite 10 fold increase since 1979 but close (av house price was £19,500). Meanwhile wages have increased from around £200 to £450 per week in the same period.
    This really does show how far house prices will need to fall over the next generation to get back to normal valuation. Calculated as you indicate would suggest that the average house should be about £50k and falling in line with currently falling wages!

  • Boris MacDonut

    #27 dr ray. DCLG has 2011 HP at £205,000 and 1979 at £20,000, so that is in fact a bit over 10 fold. Income is up 5 fold from £6,500 pa to £33,500pa. House prices would be better compared to GDP as it is all income that buys houses not just wages. The latter makes up only 54% of UK income, so can only buy 54% of UK housing. If what you say is correct ,the market would have factored it in long ago. Times move on and wages bear little relation to HP’s now.

  • Boris MacDonut

    #27 dr ray. DCLG has 2011 HP at £205,000 and 1979 at £20,000, so that is in fact a bit over 10 fold. Income is up 5 fold from £6,500 pa to £33,500pa. House prices would be better compared to GDP as it is all income that buys houses not just wages. The latter makes up only 54% of UK income, so can only buy 54% of UK housing. If what you say is correct ,the market would have factored it in long ago. Times move on and wages bear little relation to HP’s now.

  • dr ray

    I took my figures from the ONS but I wont argue with yours.
    The fact is that most houses are bought on a mortgage and rents and mortgages are paid out of wages. In fact the wage rise of x5 you quote has disproportionately gone to the top 1% of earners so the wages on which normal peoples rents and mortgages have to be supported have undershot house prices for many years.
    Even you must be able to see that house prices going up faster than the ability to service the cost cannot be sustainable for ever.
    The support at current levels is from : a) artificially low interest rates b) high rental income for B2L landlords partially supported by the taxpayer and c) money laundering by international tax dodgers
    I wouldn’t bet the farm on these continuing (except maybe the international money laundering which in prime London)

  • Christopher

    The real property time bomb reality check will be with the boomers one day trying to sell their houses to the next lot.

  • Realist, Cambridge

    29, Boris
    The reason why the market hasn’t factored it in, a long time ago, is that people have been allowed to borrow too many multples of their wage. This has now been stopped and is the reason why houses are not selling. When interest rates finally do go up, people will be forced to sell at a realistic price, becuse they won’t be able to keep paying their mortgage. So sorry, time doesn’t move on and in time house prices once again will have a relationship on wages.