Get Ready for Double Dip in U.K. Property Prices

Commentary by Matthew Lynn

Sept. 8 (Bloomberg) -- It doesn’t take much to get the British excited about house prices again. As the European fall approaches, there are signs that the market is bottoming out. It may even be rising again.


Does that mean the slump is over? Not at all. Expect a double dip in home values.

True, there are grounds for optimism. The Bank of England is printing money furiously, and the economy isn’t contracting the way it was at the start of the year. Against that, any increase in interest rates will hit the market hard, the banks are intent on restoring their balance sheets at the expense of mortgage holders, and the U.K. economy is losing jobs. All that means one thing: House prices have further to fall.

Right now, there are clear signs of recovery.

Property-research company Hometrack Ltd. said last month the average price of a home in England and Wales rose for the first time in two years. Other surveys have painted much the same picture. Nationwide Building Society said house prices in August increased 1.6 percent. That was the fourth consecutive monthly gain and the biggest since 2006.

In London, luxury-home values have been rising for five straight months, according to real estate agency Knight Frank LLP. Since it is London that often leads the whole market, such a development can only be another positive sign.

There may be more positive signals down the track. The Bank of England said last week mortgage approvals rose to their highest level in 15 months in July. If there is more money being loaned, that can only strengthen the market further.

Safe to Buy?

So it looks like the collapse in confidence in the housing market -- which has knocked 20 percent off house prices since the decade-long boom peaked in August 2007 -- is now over. It’s safe to buy a house again, right?

Not quite. There are good reasons to expect a second dip in the market later this year or early in 2010.

First, the benchmark interest rate is still at record lows of just 0.5 percent. Most people can still manage to at least pay the interest on their mortgages -- and so long as you can pay the interest, the property usually won’t be repossessed. At some point, interest rates will have to rise again. Once they do, many people will be in trouble. We can expect to see a lot more repossessions. And many of those properties will be back on the market at bargain prices, pushing prices down again.

Widening Spreads

Second, banks are repairing their balance sheets at the expense of mortgage holders. The spread between what the banks pay depositors and what lenders charge for loans is widening. According to Moneyfacts Plc, the margin on two-year money is the widest it has ever been. That may be good news for banks and their shareholders. Competition has been reduced, and it is easier for them to charge higher prices. But it is bad news for mortgage borrowers, the people who go out and buy houses.

Third, a lot of lending has been taken out of the market and isn’t coming back. According to CreditSights Inc., almost 300 billion pounds ($492 billion) of U.K. mortgage debt was securitized and sold to the bond markets from 2005 to 2007.

“That represents more than 90 percent of the growth in mortgage debt over that period,” it said. The world isn’t exactly clamoring for British securitized mortgages anymore, and won’t be for a long time. With less money coming into the market, there won’t be the same kind of demand for houses.

‘Socially Useless’

Fourth, for reasons that a psychologist could better explain, the British are attacking the financial-services industry, even though it is the biggest branch of the economy. The chairman of the U.K.’s Financial Services Authority, Adair Turner, even proposed a tax on financial transactions to help limit the size of the industry. He described parts of banking as “socially useless.” With that sort of attitude, it won’t be surprising if many foreign bankers go elsewhere, withdrawing their support from the housing market.

Finally, the U.K. economy is set for a decade of slow growth. Unemployment rose to the highest level in 14 years during the second quarter. Monetary expansion and government spending are tempering the decline somewhat, but the fiscal stimulus will have to end soon, and the big tax increases needed to bring the deficit under control will keep demand subdued for years. There is still a lot of pain ahead and house prices can’t grow much faster than the overall economy.

Don’t be fooled by the slight recovery in house prices over a few months. Markets always stabilize for a period, both on the way up and on the way down. It is just a pause for breath -- and the second dip in the crash is just around the corner.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.


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