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UK ‘at risk of US-style housing slump’

Economic growth, Leverage
By Paul Hodges on 19-Apr-2008

UK readers, and others invested in the outlook for the UK housing market, may be particularly interested in the FT this weekend. It devotes 2 prime pages to a detailed analysis by Fitch, the ratings agency, of sub-prime and buy-to-let lending. As we know from the US, these are the most risky types of lending, as borrowers have little ‘skin in the game’ and can most easily walk away from their losses.Until recently, opinion was strongly against the idea that the UK could possibly face similar problems to the US, as lenders had allegedly been ‘more responsible’. Quite how this opinion squared with the universal availability of 125% mortgages (where you could borrow more than the value of the house), and of income multiples of 10 x salary, was always a bit of a puzzle. It was perhaps due to the common desire ‘to believe what one wants to believe’.

But now Fitch has researched the issue, and the facts are available. I find them scary, and can understand why the FT has headlined them. It turns out that most of the UK’s major cities have high concentrations of the risky buy-to-let (BTL) mortgages. Canary Wharf, for example, the centre of London’s financial district, has 28% BTL ownership.

With experts now predicting 40,000 job losses this year in financial services, BTL landlords may find it hard to continue to find sufficient high-paying tenants to rent these apartments. Equally, some towns now have over 10% of sub-prime borrowers. This is also worrying, as Fitch comments that ‘subprime borrowers are 10 times more likely to default than the nation generally’.

Full details of the survey, and an interactive map, are available on this link.