LONDON—By all rights, Britain's housing market should be buoyant, floating along on a raft of strong economic indicators. Unemployment is falling, incomes are rising, and interest rates are relatively low. But instead it has run aground. The real estate monitor called the Royal Institute of Chartered Surveyors just issued one of its gloomiest membership surveys ever: 82 percent of members reported falling prices between January and April. One big bank says house prices have fallen 4.2 percent nationally so far this year. And mortgage lending has plunged to its lowest level in 33 years.
Therein lies the rub, says Michael Ball, an economist at the University of Reading. "You need credit for the market to work." But that's a scarce commodity these days, thanks to the global credit crunch brought on by America's subprime mortgage fiasco. It has pulled the plug not only on Britain's housing market but on many others around Europe. "Everywhere, there are problems," says Christine Whitehead, a housing economist at the London School of Economics. Within the eurozone, the European Central Bank says, mortgage loans are increasing at their slowest pace since the euro debuted eight years ago.
The subprime losses have made banks risk averse, so interbank lending is at a near standstill. That results in less money available for mortgages. British banks and building societies are cutting way back on mortgage lending and greatly tightening the terms of loans they are still willing to make. A year ago, 100 percent mortgages were commonplace. No longer. Most banks are now looking for down payments of at least 10 percent.
The banks are reeling, too. Last September, Northern Rock, Britain's third-largest mortgage lender, came up short of cash when the credit markets dried up. A run on its branches ensued, and Northern Rock has since been nationalized by the government. HSBC, Britain's largest bank, has so far written off $15.6 billion in subprime losses, $3.2 billion this year alone. Two other banks, the Royal Bank of Scotland and HBOS, are seeking cash infusions from shareholders to bolster their sagging balance sheets, and analysts expect Barclays to do the same.
To inject more money into the system, the Bank of England last month announced a $100 billion bailout that lets banks exchange worrisome mortgage debt for secure government bonds.
The Halifax, the largest mortgage lender, predicts that Britain's housing prices will tumble this calendar year by around 5 to 6 percent—an estimate that both Ball and Whitehead agree with, though Ball says that a drop of 10 percent is possible if the credit squeeze doesn't ease soon. A 10 percent drop would slice nearly $40,000 off the average residential valuation here. Housing prices in the United Kingdom jumped an average of 114 percent between 1996 and 2006.
Now that the bubble has burst, what will most likely save prices from sinking by more than 10 percent is that many sellers as well as buyers will shun the market out of fear, Whitehead says. "What you are more likely to see is stagnation." Indeed, the British Bankers' Association says mortgage approvals are down 46 percent from a year ago, and the chartered surveyors also report they're seeing fewer prospective buyers. The average amount of time a property stays on the market now is 85 days, 14 more than a year ago.
Elsewhere in Europe, the squeeze may be even worse. Ireland's residential property market soared in value 170 percent from 1996 to 2006, but prices fell 7 percent last year, mainly because of interest-rate hikes. Now, the additional pressures of the credit crunch could push prices down by another 5 percent this year. In Spain, between 1996 and 2006, housing prices jumped 133 percent. Now, one economist says they could fall by 20 percent this year. And unemployment has jumped sharply in Spain this year, too, which won't help matters.
One bright spot in the U.K.: the superhigh end of the market, where prices start at $10 million, and where most buyers pay cash and don't need mortgages. "That market is still very strong," says Peter Young, managing director of John D Wood & Co., a real estate company that specializes in high-cost properties. "And demand is exceeding supply."
Back at the market's lower end, the fall in prices won't make it easier for first-time buyers to jump onto the lower rung of the property-market ladder because many won't meet tighter mortgage criteria. Moreover, it should put an end to speculative purchases, too. Some buyers were snatching up homes as short-term investments in hopes of making a killing. Says Ball: "That frothiness is gone now."