“Heading for the Worst Housing Market in a Decade,” But Not in North America — Yet

On Monday, the May edition of the Rightmove House Price Index (the largest monthly sample of residential property prices in the UK) was released, and the news wasn’t good.

 The not-so-subtle headline of the report read as follows: “Heading for the Worst Housing Market in a Decade.” If you listen closely, you can hear the high-pitched whistle of air escaping from the UK real estate bubble. Stand back, because it’s going to burst soon.

 Let’s go over the facts:

 — Britons are feeling the heat of five interest rate hikes in 10 months — The recent British property boom saw house prices double in five years — Over a fifth of surveyed recent home buyers in the UK opted for a 100% mortgage — More than a third of buyers needed to borrow money to put down a deposit on their homes — British mortgage debt-to-income ratios are at their highest historic level, at about 28% — General consumer debt in England is at record levels — Household spending has been up for 51 straight quarters — 2005 real estate transactions are at their worst levels since 1995, and predicted to fall below 1.1 million for the year — There have been only 159,116 closings in the UK real estate market for the first three months of 2005 — the worst number since 1995 — Real estate prices’ annual rate of inflation fell to 4.9% – the second fall in two months, and the lowest growth since 1996

 In other words, prices are too high, consumers are debt-laden and tapped-out (yet continue to spend), interest rate hikes have put pressure on consumers’ ability to pay, and now the real estate market could be in a crisis as a result.

 Hmm. Could it happen here?

 In the UK and here at home, low interest rates have encouraged homebuyers to upsize, rather than downsize as they should be doing. Buyers all over Britain, the U.S., and even here in my backyard in Toronto are buying big homes at big prices. Homebuyers have been tricked into thinking that the measure of their mortgage affordability is the ability to make a monthly payment. These people are looking only at the very short term, which only makes sense in our deeply rooted buy now/pay later consumer culture.

Dedicated readers of PROFIT CONFIDENTIAL may remember Michael’s commentary last summer discussing a recent trip to London. He had an enlightening conversation with a local bike taxi driver about the property prices in England. The young man had just got into the real estate market, putting a 5% down payment on a US$300,00 home, and was hoping to turn a quick profit. When Michael brought up the subject of rising interest rates, the taxi driver said, “Doesn’t matter. This is England. Property prices rise 8% every year.”

Not this year, however. Or the following year. Or the year after that…

The situation we see unfolding today in the UK is foreshadowing what will inevitably happen here in Canada and the United States, so pay attention.

If you’ve just purchased a home, have your housewarming party early. If you wait, with interest rates rising, house values dropping, little to no equity in your home, a high mortgage debt- to-income ratio, and increasing mortgage payments that will soon be hard to make, you may not be able to afford decent hor d’oeuvres six months from now.