Uks New Property Normal Looms

Those of us who remember the last house price crash that lasted from 1989 to around 1994/5 will be familiar with the term negative equity

. This affliction blighted entire swathes of the UK from the smart streets of Londons Chelsea to the grey terraces of Hull. Negative equity is what Americans refer to as being underwater and refers to the value of a property being less than the sum owed on it.

The prime driver of this phenomenon in the UK back then was the proliferation of so-called low-start or deferred mortgages. There were, of course, other factors including non-status or self-certification mortgages and foreign currency types like those denominated in the forerunner to the euro, the ECU or European Currency Unit but the deferred variant played a more significant role. These mortgages effectively allowed the borrower to pay a lower interest rate on the mortgage whilst having the remainder added to the mortgage principal. The idea was to give those with lower incomes an opportunity to gain a foothold on the property ladder and tended to be provided by a new breed of lender. These were called centralized lenders. They were a departure from the traditional source of mortgage finance, the building society or thrifts or savings and loans as their US equivalents were known. They simply raised money on the money markets and lent it at cheaper rates to mortgage hunters. They had no need to maintain a branch network like the building societies because they sourced their business through intermediaries like mortgage brokers and insurance consultants eager to sell products designed to pay off the principal after an extended period, typically 25 years. The loans were then packaged up and sold on to investors thereby freeing up capital the centralized lenders could then reintroduce into the market.

Sound familiar?

Deltacontinental analysts say that the current malaise in the UK housing market could persist for longer than that of 1989 because, back then, there were far fewer lenders offering this type of financing. The bulk of mortgages still came from building societies but thanks to the relaxation of rules governing access to money market funds, the decade-long boom to 2007 saw most of the funding sourced from the money markets.

One Deltacontinental analyst said that the current slump in UK property would worsen far more than many suspect.

Interest rates in the UK will rise sharply of this there is absolutely no doubt and when they do, there will be utter carnage. People need to realize that many mortgage holders have been insulated from the effects of the economic crisis because the Bank of England has been trying to save the banking system. The low mortgage rates being charged currently are a mere by-product of bailing out the banks but the country simply cant afford to underwrite these policies forever. Sooner or later, interest rates will be hiked and an awful lot of people are going to lose their homes. Already, the Bank of England is planning to cap mortgage lending to prevent borrowers taking on more than they can afford by insisting lenders demand at least 10-25% of the purchase price by way of a deposit. In that type of environment, there are going to be far fewer buyers than at the height of the last boom so dont expect the good old days to return any time soon.

Deltacontinental believe that the UK faces the worst wealth destruction tsunami for generations. The government is already tightening up welfare benefits including those that pay interest on existing mortgages so those who think they will be able to rely on the safety net will be bitterly disappointed. Over 600,000 public sector workers will lose their jobs over the next 5 years and private sector is not creating enough jobs to accommodate the newly-unemployed.

We expect repossessions in the UK to exceed those of the previous rout in property and we have been advising our clients to resist temptation and avoid UK property like the plague, said the Deltacontinental analyst.

by: William Howlett

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