What the Retail Clerk Told Me in London

Returning home from a recent trip to London, I was in a duty- free store at Heathrow where I met a retail clerk. The young man was British and worked in a retail shoe store. He told me his wife also worked in the retail field.

Anyhow, the point of the story is about the young man’s recent “investment.” He told me that he and his wife had just bought a small home about one-hour outside of London for 240,000 Pounds (about $430,000 American). They were actually closing the next day.

Like the fellow I met a couple of days earlier in the bike taxi, this retail clerk had also put 5% down to buy his “investment.” And that’s where my question came in. “Why do you refer to the purchase of a home as an investment? I never looked at a principle residence as an investment. After all, don’t we all need somewhere to sleep at night?”

To this, the young man explained that he had been happy renting, but saw all his friends making big money flipping London-area homes. He explained he was buying his first property for fear of being left out of “ever rising” real estate prices. He was concerned that if prices rose more, he would never come up with the 5% down payment.

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The most recent figures show house price inflation is running at about 20% a year in England. That means homes have increased in value by 20% in the last 12 months. And from the people I spoke to in London, most property buyers were entering the market so they would not lose out on even higher prices down the road. And many of these buyers are really

stretching it to make those monthly mortgage payments.

Unlike here, where interest rates have risen slowly, the Bank of England has raised rates five times now. The equivalent of the Federal Funds Rate (1.5% here) is now 4.75% in England. Analysts there are predicting two more rate hikes, taking the rate to 5.25% by early 2005. Funny thing: Property prices have skyrocketed, people continue to buy, and there’s very little concern on the buyers’ part about higher interest rates.

Halifax Bank, Britain’s biggest lender, is putting up the cost of its home loans and tightening its lending criteria. This bank is concerned higher rates will lead to an increase in arrears and repossessions.

In 2003, mortgage firms repossessed about 7,800 properties in England, a record low. In all strong rising markets, like the England property boom right now, people quickly forget the past. 75,000 homes were repossessed in England in 1991 because of defaulted mortgages. Oh my, how the past is quickly forgotten.

I see the Britain property market boom at the height of its speculative phase. The last time I witnessed such rapid speculation in a market would have been the tech boom of 1999. We all know what happened after that. If property prices collapse in England will that affect us here in North America? You bet it will… after all, is it not a global economy now?