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JULY 19, 2004
Bubble, Bubble, Housing Trouble In Britain The BOE is steadily raising rates in an attempt to cool Britons' rage for property Like many britons, Katherine Golby, a 32-year-old local government official, has done very nicely in property. She bought a house seven years ago for $91,000 and just sold it for $255,000 -- which she plowed right back into a bigger $309,000 house for herself in Bedfordshire, within commuting distance north of London. Her new purchase saddles her with a $1,457 monthly mortgage payment -- a hefty 40% of her aftertax income. "It does worry me," she says. "I could move to a cheaper property if things got really bad." That's exactly the question: Are British homeowners, especially those buying now, saddled with a depreciating asset? True, the British appetite for property seems insatiable. The boom started in London in the mid-1990s. While prices there have leveled off in the past couple of years, they've been rising fast in the rest of the country. From March through June, home prices in the north of England and Wales grew more than 30%, and Scotland 24%, over the previous year. Overall, the national house-price index of the Nationwide Building Society, a big mortgage lender, has doubled in the past five years. Yet analysts are split on whether Britain has blown itself a housing bubble. Yes, the ratio of housing prices to income is at a 50-year high of nearly 6 -- about 55% over the average. And initial mortgage payments as a percentage of income are high at about 29%. Moreover, the mortgage-payment burden is going up, with each quarter-point rise in interest rates adding about $25 a month to a typical payment. Optimists counter that historically low rates and a robust jobs picture mitigate the risk. Mervyn King, Governor of the Bank of England, and his associates on the rate-setting Monetary Policy Committee are taking no chances. They don't want to relive Britain's last boom-bust cycle, when a runup in housing prices in the late '80s was followed by a crash, a long recession, and a spike in unemployment in the early '90s. So the BOE has moved ahead of the rest of the industrialized world and raised rates four times since November, to 4.5%. "We cannot, and do not, ignore the influence of soaring house prices," Deputy Governor Rachel Lomax declared July 1. NO ALTERNATIVES Britain could avoid a crash if the jobs picture stays strong. Unemployment is 4.8% -- the lowest among industrialized countries -- and continues to drop. Incomes are rising at an annual clip of 5%. That means Britons can afford more expensive houses. "This time is different," says Jim Carrington, area sales director of Bradshaws, a real estate agency in Bedfordshire. "In the early 1990s people were getting laid off. Now trying to find people to work for you is bloody difficult." Other analysts point out that mortgage rates, now around 5%, are historically cheap, and that at the end of 2003 the percentage of mortgages in default was the lowest in a quarter-century. Moreover, stagnant bond and stock markets don't offer investors much of an alternative. "There are too many people wanting to buy property for prices to slump," insists Lyndon Le Boutillier, managing director of Hearnes Estate Agents in Dorset, in southwestern England. For the worriers, the rate increases and King's jawboning appear to be having the desired effect. Real estate agents report that home buying is slowing and prices are leveling off. Yet while economists expect interest rates to top out at around 5.25%, some fear they could rise as high as 6% if inflation becomes a threat. "Buyers assuming that 5% to 10% annual house-price growth will be the norm in the coming years are very likely to be disappointed," says Alex Bannister, Nationwide's group economist. Britons can take a little disappointment. It's an outright crash they want to avoid.  By Stanley Reed in London
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