Is a property crash more likely now in the UK?

With the news a few days ago that Britain’s second largest lender, Abbey would be lending up to five times income for some borrowers, one is reminded that crazy things happen to sane institutions before a fall.

Many at the moment do not dispute that the UK housing market is in a dangerous state of flux. Certainly those entering into spending their hard earned cash and ‘selling out’ their future by borrowing large income multiples should pause to consider the risks, or those who have just taken the plunge should expect to face each month as the Bank of England’s MPC meet with in trepidation.

Certainly the ‘runes’ don’t bode well for the market at the moment with indications that the peak is near or has already happened, with just the ‘fools’ rushing in at the moment.

BN takes a view on a series of reports out last week, which are pointers of what’s to come. Those who remember the ‘dot com’ days are wondering if the sense of deja vu in the back of their heads applies equally to the housing market.

BN notes that

“While house prices start to soar again, our level of debt is building. We all know that for would be First Time Buyers, jumping on the property market is becoming a mission impossible. To an extent though, Buy to Let investors are stepping into their place, and the frustrated would be buyers are renting off landlords who are using the growth they have seen in other properties in their portfolio to meet the lending criteria of the mortgage companies.
And as long as supply is lower than demand, prices will be kept up. And the Abbey move to offer mortgages of five times joint income can only lead to a short term rise in demand. But supposing property owners are forced to sell, supposing they can no longer meet their mortgage payments? To a large extent this is what happened in the late ’80s, with repossessions, perhaps, the main catalyst for the crash that followed.”

Furthermore the writer goes on to point to previous market conditions that may lead to increase in debt and thus lack of cash to pay for the mortgage bills.

“First of all, Friday saw the release of the latest data on insolvency. And once again, the number of individual insolvencies is up. In total there were 27,644 individual insolvencies in England and Wales in the third quarter of 2006 on a seasonally adjusted basis. This was 5.7% up on the previous quarter and a massive 55.4% on the same period a year ago. And now the UK seems to be on an inevitable course for 100,000 insolvencies in a year.”
Have these numbers anything to do with a further set of figures released on Friday.

“And then, Friday also saw a piece of data, which to our way of thinking is even more serious. In the quarter just gone, the number of possession actions taken by lenders hit its highest level since the second quarter of 1992. In total there were 34,626 possession actions in 2006 Q3 and the number of court orders awarding possession of properties to lenders also rose in 2006 Q3 to 24,017, the highest figure since 1993 Q3.”

You could argue that the figures and statistics released last week are not in any way co-dependant and that the writer of the article is merely lining up the runes to point in the direction he wants.

Whilst we’re always cautious of the arguments of ‘cause and effect’ it seems that simple common sense indicates that the housing market cannot keep moving upwards unless inflation suddenly takes on a runaway level. At the same time if the steam runs out of the housing market then the buy-to-let brigade will need to find somewhere with a better return for their cash. This would lead to a sell off in property, which would lead to a decrease and thus the need to sell off more of the property assets the buy-to-let brigade already own – a crash, soft or hard would precipitate.

The ugly situation for the housing market would be controlled inflation, higher interest rates and cost/income levels out of reach of the normal consumer. Simply put, these runes are already in place. The banks decision this week in the UK will profoundly point the way for the future of the housing market.