While I was in Europe last month for a conference near Paris, I had a chance to chat with folks from the U.K., Ireland, Spain, and other nations about the ongoing sub-prime housing crisis gripping U.S. markets.
The biggest concern on their minds was whether Europe would soon be facing a housing recession of its own. An intriguing question to be sure, so I did some digging.
As I detailed in a blog post at the time (Is a Home-Grown Housing Crisis Brewing... in Europe?), sharply rising home prices in recent years have put housing affordability out of reach for many home buyers -- on both sides of the Atlantic!
If you thought the rise in U.S. home prices was over inflated, you should take a look at these numbers:
A common measure of housing affordability is the price to rent ratio, which compares home prices to owner-equivalent rents. In the U.S. the price-rent ratio increased about 40% between 1990 and 2006, but in parts of Europe this ratio has really skyrocketed.
In France, Spain and the U.K. the price-rent ratio expanded about 50% over the same period. In Holland it jumped 125% and in Ireland soared over 225%!
U.K. May Soon Face a Housing Slump of its Own
A recent article in the Financial Times details just how worried Britons are about their overpriced housing market. In the U.K. home prices jumped 144% since 1996, while U.S. home values increased 127% from 1996 to 2006.
The higher the rise, the greater the potential fall, so if anything U.K. home values appear even more overdone than in the U.S.
Recently, British home owners are beginning to experience a reversal of fortune.
Overall prices have fallen by about 1.5% in Birmingham England since July, while overall home prices in the U.K. fell 0.6% in September, according to mortgage lender Halifax.
“Even in prime central London, the upward momentum is showing signs of flagging”, according to the Times article. While the City’s home prices are still appreciating, September brought the “smallest price growth for more than a year.”
Will Britain Follow the U.S. into a Housing Recession?
The worry now is that Britain is likely to follow the U.S. in a sustained downward spiral in home values, just a year or so behind our lead. Already shares of U.K. home builders have fallen 28% since January, the worst performing sector on the London Stock Exchange.
It’s worth noting here that the U.S. Housing Sector Index served as an early-warning signal, foreshadowing the recession in home values here. The index actually peaked in mid-2005, as U.S. home price appreciation leveled off. And the Housing Sector Index had already plunged about 28% from its high, by the time U.S. home values began declining on a national basis about one-year later.
The similarities are stunning between housing “bubbles” in the U.S. and the U.K., but there are differences as well.
Britain has endured a shortage of hew housing for years, and new construction there never hit such a frenzied pace as in the U.S.
Also, U.K. lenders did not indulge in quite as much “creative lending” as U.S. mortgage brokers. However, the U.K. market did experience a “relaxation of credit standards” similar to the U.S.
U.S. Sub-Prime Contagion Spills Over on the Other Side of the Atlantic
But the crisis in U.S. sub-prime mortgages hit property markets in the U.K. pretty hard; the recent bailout of Northern Rock, the fifth-largest mortgage lender in the U.K. is testament to that fact. As a result, "fewer loans are being made and interest rates for most mortgages have shot up, meaning that repossessions (foreclosures) could rise", according to the article.
And as the U.S. housing and financial sectors brace for hundreds of billions in sub-prime mortgage resets over the next 18 months, the outlook is similar in the U.K.
Independent analysts say that U.K. homeowners face “one of the largest payment shocks witnessed since the 1990’s” as 1 million customers with floating rate loans face higher payments. This means monthly mortgage repayments for U.K. borrowers could jump by about 30% over the next year.
For those who believe a recovery in housing and financial markets is just around the corner, this story should serve as a cautionary tale... on both sides of the Atlantic.
Comments