Will UK Property Crash Like America?

Posted:Abigail Andrews - Friday, March 21st, 2008 at 9:39 am.

The US housing crisis is all over the news, and many of us are now asking, what will happen to UK property market? Is it still true that whatever happens in America comes to UK 6 months later?

If you are a regular reader of my site you may have already realised, I am in favour of property as investment. It certainly features in my investment portfolio, but I am also acutely aware of the risks, and always state property is an investment for the long term. In the long term any investor should see through any downturn in the market and be able to cash in on the growth. In the short term, I agree, we are heading for troubled waters.

I am also acutely aware of the risks, and always state property is an investment for the long term.

I also agree that it is likely that the property market needs to go through a phase of correction, to rectify the gap between house prices and average salaries, however, the question I ask is; will the next downturn be as bad as some are suggesting? Just because the US is experiencing a housing crisis, does this really mean we are heading down the same path? Furthermore, do the same issues affect the UK housing market, or will our housing market fall for entirely different reasons?

Reasons why UK property is different to US

People argue that what happens in America will happen here. I argue that, for the current US housing crisis anyway, this is not necessarily true. Here are just some of the reasons UK property market is incomparable to the US:

High Employment in UK

High unemployment levels alone would probably not necessarily result in a housing market crash, but it is quite obviously one of the biggest factors contributing to a slump in the property market anywhere in the world. Forced selling, due to people losing their jobs, is one trigger for house price falls. Thankfully, here in Britain we currently have high employment levels with unemployment at a 30-year low. The house market may slow, even fall somewhat, as people cant afford prices, it does not mean it will collapse like the US and for the same reasons. The US currently has its highest unemployment levels since 2005 and it is climbing due to a weak economy. The same reasoning cannot be applied to the UK.

Thankfully, here in Britain we currently have high employment levels with unemployment at a 30-year low.

Low Interest Rates and Stronger Economy

Housing market conditions today are very different to those we saw in the early nineties. Interest rates and mortgage rates remain at comparatively low levels and further expected reductions in interest rates should help to boost confidence.

The broader UK economy is relatively strong and currently much more robust than the US. Current economic prospects look benign compared to the early 1990s, when people were forced to sell their homes as prices fell, unemployment soared and negative equity took hold. We maybe seeing echos of this in the US, but in the UK our overall economy is much stronger.

Less Sub-Prime Lending in UK

It is hard to believe as reports on news and in papers contradict this, but lending in the UK if far more responsible than in the US. The US have been lending very irresponsibly for years, by way of sub-prime mortgages. For those who don't know, these are mortgages that carry a much higher risk of default by the borrower than other kinds of mortgage lending. Put simply, sub prime mortgages are loans to people who have patchy credit histories or cannot prove their incomes. UK banks are more responsible in taking account of an individual's ability to pay. Even when you hear in the media that UK banks are NOW lending 9 times income, don't be fooled, THEY ALWAYS HAVE DONE, and they have done so for years. UK banks assess an individuals ability to pay and lend if it is within affordability, even if that happens to be nine times salary, its nothing new!

Even when you hear in the media that UK banks are NOW lending 9 times income, don't be fooled, THEY ALWAYS HAVE DONE, and they have done so for years.

Yes, in the UK, banks like Northern Rock have been victims of the "credit crunch" which threatens the housing market too, but its suffering was due to its "dodgy" business model. This bank has gorged itself on cheap debt and was entirely dependent on short-term cash from the money markets to keep funding its dubious business model.

Yes, there may also be other casualties, but the BIG UK banks are much less exposed than their American counterparts. Lending has been more responsible and any risk of sub prime should be protected by savers' deposits. We have seen many of the BIG UK banks announce profits early this year and non have been that bad. I mean when a bank announces 7 billion in profit, there is surely very little to worry about? All the big UK banks are easily able to withstand any write-offs from their exposure to US sub-prime catastrophe.

High Demand and Low Supply

To listen to the sceptics you would believe that the outlook for property in the UK is dismal, but what is forgotten is owning a home is an emotional desire and the demand for property in Britain remains high, with this cultural factor playing a very important role. It is very much part of our culture that we should own our homes. Until that motive weakens, demand for property will remain high. On that basis alone, if prices fell by the forecasted 10%, many aspiring buyers would see this as a good purchasing opportunity. It is partly that fact that has made the market grow to its current high levels. I don't believe any first time buyer who says, in a falling market they would wait until it hits bottom before they try jump on the ladder. In that situation I know I would jump on the ladder just as soon as prices hit a level I could afford, even if I had an inkling prices would fall further, I wouldn't dare risk missing the boat, and neither would many FTB's. Call it human nature!

Owning a home is an emotional desire and the demand for property in Britain remains high

There explains 'part' of the reasoning for the high demand but, there is also a shortage of supply in the UK too. The shortage of properties can partly be blamed on the Government, who set targets for the number of properties to be built year on year. However, these targets focus on quantity rather than quality, hence the over supply of apartments that can be seen at the current time. Target-led development has encouraged developers to concentrate on apartments, in order to deliver the most homes at the cheapest price. Even though we seem to have loads of apartments, there is actually a shortage of good quality family houses, which in turns pushes up the cost of property lower down the ladder.

The Home Builders Federation says around 180,000 new homes are being built across the UK each year. But the Government admits that it needs 230,000 new properties just to keep up with the annual growth in the number of households, a trend fuelled by more people living alone, for various reasons, discussed later. The US on the other hand has loads of Properties and not enough buyers in many areas across the country mainly due to their weak building regulations and controls, again this is discussed later.

Immigration and Increase in Households and Less Land

True, immigration affects the US as well as the UK, but combined with under supply, less land, more and more countries entering the EU, and other social factors, such as more single people living alone due to high divorce rates and higher life expectancy, immigration, quiet obviously, has a higher impact in the UK that the US. It mostly creates more rental demand, therefore encouraging investors to buy. Quite simply we are a small and relatively crowded island, far, far smaller than the US, and there is no getting away from that. Land becomes more expensive because there is less of it and therefore more demand for it.

Britain has tighter controls on new building and is more dependent on second hand housing stock than America, which has seen boom areas witness vast urban sprawl.

Investments Properties/Buy to Let

Buy-to-Let and Property Development have become increasingly popular in recent years and with so many investors taking advantage of cheap and relatively easily attainable Buy-to-Let mortgages, combined with the other reasons mentioned in this post, Buy-to-Let once again plays its part in lowering the supply of properties for sale and thus creating more demand. Yes, it is as easy to invest in property in the US, however, once again, with more properties to go around this does not have the same impact as in the UK.

Tighter building Regulations and Restrictions

As Warren Bright, chief executive of www.propertyfinder.com said: "Restrictive planning policy enthusiastically enforced by local councils has severely constrained the ability of developers to provide the number of homes needed by Britain's rising number of households, and has exacerbated the rise in property values."

Britain has tighter controls on new building and is more dependent on second hand housing stock than America, which has seen boom areas witness vast urban sprawl. Just another difference between the US and UK. The supply of property in some parts of the US such as Florida, far outweighs the demand. Thus, a massive correction of the property market in some parts of the US. Here in Britain building regulations and restrictions are much more tightly controlled. Unfortunately we have seen some relaxation of building restrictions in many city centers across the country. Cities saturated with apartments, for a market crying out for houses. If anything, this part of the market will see the greatest falls.

Final Thoughts

The question is: will the UK property market crash and if so will it crash for the same reasons as the US? Well, the housing market contributes to the overall health of the UK economy, but like many other things, goes up and down in cycles. If the UK property market crashes, it will be those around the edges that feel it most, mainly recent buy-to-let landlords and first-time buyers, especially those with city centre new build flats.

My biggest annoyance is people use the word "crash" loosely, without definition these days. We hear it time and time again on the news, on the internet and we read it in the papers. But, what defines a property market crash? What on earth does this "crash" look like? I searched and searched and cannot find a definition anywhere on the internet. Is a "crash" defined by a mathematical calculation, is it a 10%, 20% or even 30% fall in house prices over a certain time period, or is it simply continuous negative growth over a number of months? Perhaps it is time we started defining the term "house price crash" before using it so widely!

I agree house prices have to fall, but will that fall be a crash or simply a correction to adjust to a more realistic house price to wages ratio. (You see if everyone else uses the words crash and correction so loosely then so can I.) All I know is everyone is in agreement that house prices can't continue to rise at the phenomenal rate that they have over the last five years. Though, currently, if prices stagnate, which they have already begun doing, with employment high and the economy continuing to grow, home-owners should be able to sit tight, and those who have owned their home for longer than five to ten years should be protected from negative equity. Buy-to-Let landlords may also prove more resilient than sceptics think, and will likely be content to sit on what they see as their pension.

None of this bodes well for the property market doomsters, those doomsters that have been predicting their "crash" all over the internet since 2004 and earlier.

None of this bodes well for the property market doomsters, those doomsters that have been predicting their "crash" all over the internet since 2004 and earlier. I will restrain myself from posting the hundreds of internet links from the last few years saying the crash is here, and advising not to buy. If you want to see the volumes of doomsters who got it wrong time and time again, please search for yourself. Though obviously, eventually they will be able to say they were right, even if it has taken 4 years for the property market to prove them so!!

Lastly, to answer my second question, if the UK property market, for want of a better word, "crashes", it will likely be for its own reasons and not for the same reasons as the US. As pointed out in this post, the UK property market is completely incomparable to the US, thought how much it will be affected by the tidal wave that is coming across the Atlantic has yet to be seen. What's obvious is the era of buying a home and sitting back while it soars in value is undoubtedly a thing of the past, FOR THE TIME BEING !!!

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