Britain Feels Impact From Slowing House Market

Posted by: Mark Scott on June 11

They say an Englishman’s home is his castle. Yet after a recent survey showed British house sales were at their lowest level since 1978, the English (and the Scottish, Welsh, and Northern Irish for that matter) may have to make do with less stately accommodation.

Like their U.S. counterparts, times are tough for British homeowners. Mortgage lender Halifax, part of the HBOS group, reckons housing prices have fallen in seven of the last eight months, while a further 10% decrease is predicted for the rest of 2008. Next year is expected to bring an additional 10.5% drop.

All that has come as a shock for many Brits who have benefited from a doubling in house prices since the 1990s. First-time buyers that took out 100% mortgages at flexible interest rates to get onto the property ladder now are defaulting on payments. And even seasoned homeowners, who were banking on selling their much-appreciated houses as part of their retirement plans, face financial uncertainty.

To show how bad things have gotten, shares in Barratt Developments, Britain's biggest house builder, fell 35% on June 10 (and dropped a further 21% on June 11) due to fears the firm would need as much as $2 billion in new financing to cover its debt obligations.

To be fair, Barratt says it doesn't have short-term credit issues and is in talks to refinance $800 million of outstanding borrowing costs. The company will give a further market update on July 10.

Not all analysts, though, are convinced. In a June 10 research note, Dresdner Kleinwort told clients to "cut their losses" in the beleaguered firm, adding "no-one should consider buying until details of writedowns, gearing, and any financial restructuring become clear." The main hope, according to the bank, will come from an outside investor, possibly private equity, which could shore up Barratt's financial standing.

While it's hard not to sympathize with British homeowners now facing negative equity, the recent dip in prices appears to be the downward swing of the cyclical housing market. What goes up, as the old adage goes, must come down, and not even the most bullish analysts expected British house prices to remain at historic highs. Now, the real question relates to how long the current drop will last. And as U.S. homeowners can attest to, that's something almost impossible to answer.