Abbey precipitates UK housing crash
For observers of the UK housing market there were more signs yesterday that the market is a bubble and that the country’s second largest lender, Abbey, may have precipitated the start of a crash.
Recently the Spanish owned bank released figures from it’s own findings that nearly 7 million people in the UK cannot afford to raise a deposit for a property and that 17.3 million are struggling to get in to the housing market.
Yesterday the bank announced that it would move from its current policy of lending 2.75 times a couple’s income to 5 times the couple’s gross income. This would apply to couples earning more than £50,000 ($95,000) jointly. The bank also states that it would apply credit checks, though most lenders usually say this and don’t bother.
At the same time the bank has relaxed the requirements for placing a deposit on loans under £250,000. So a couple will only need to raise 3% on a loan of £240,000 instead of the usual 5% or 10%.
While this may sound good for those struggling to get into the already over-heated housing market it should be viewed with concern by government policy makers, who until now have done little to quell the speculation in the UK housing market.
With the likelihood that interest rates in the UK are about to pick up on their upward direction it seems that the timing of the announcement from the Abbey may actually precipitate a crash in the housing market in the near term.
If borrowers rush to the Abbey to gear themselves heavily then this will add to the dilemma faced by the Bank of England. The UK consumer is already the most indebted in Europe. Any increases in interest rates to stifle inflation could end up rapidly spinning the nation into a recession as consumers struggle to repay debt and stop spending altogether.
Previously such lending ratios were only allowed for those in rapidly advancing professional careers or those who would expect big city bonuses each year. So this offer to virtually everyone will increase volatility of the market.
We see this as a worrying and desperate trend. As we’ve outlined before, the housing market is a bubble and pumping more air into the bubble is never a good thing. To those of you thinking about taking up the 5 times offer we urge extreme caution – you may have more to lose than you think.