Run on Northern Rock signals boom may be ending
(LONDON) Nick Collins, an independent London real estate broker who has had record profits every year since 2003, took a hit in September - and that may be bad news for a UK economy built on a housing bubble. Five of his 50 buyers pulled out of purchases, spooked by a run on mortgage lender Northern Rock plc that left it £2 billion (S$6 billion) poorer.
Any takers? With mortgage lending cooling and house prices falling, the economy may start to slow down'It's undermined people's confidence,' says Mr Collins, 38, who sells homes worth as much as £5 million. 'The market's not as frothy and competitive as it was.'
Northern Rock, which cratered after investors baulked at buying its debt, is one of several signs that the UK's property boom may be ending. The average home almost tripled in value in the past decade, helping to fuel the country's 15-year economic expansion - the longest in two centuries - and buoying the governments of Tony Blair and Gordon Brown.
Now, with mortgage lending cooling and house prices falling for the first time this year in September, the economy may be in the early stages of a slowdown.
'UK house prices are significantly overvalued and extremely vulnerable to a correction,' says Danny Gabay, a former Bank of England economist and a director of London-based Fathom Financial Consulting Ltd. 'The downside risks to economic growth over the next 12 months are significant.'
The UK economy had been the envy of Europe, outpacing Germany and France almost every quarter from 2001 through 2005. Germany surged past the UK last year, and for 2008, Europe's largest economies are forecast to run in a pack. The UK will probably grow 2.3 per cent next year, while Germany and France will each expand 2 per cent, the International Monetary Fund said on Oct 17.
Britain's expansion has been spurred by a borrowing spree, thanks to interest rates at 40-year lows from 2001 to 2006. By the end of 2006, the British owed £1.37 trillion, or 1.61 times their income - the highest rate in the Group of Seven nations, according to the London-based National Institute of Economic and Social Research. By June 30, the ratio had grown to 1.66. The US rate remained at 1.42 during that period.
Britons poured the borrowed money into housing - and then used their new homes as collateral to take on even more debt. Residential property prices soared 189 per cent in the past 10 years, almost twice the increase for single-family homes in the US, according to HBOS plc, the UK's biggest mortgage lender, and US government figures.
Consumers have spent some of these gains and loans on goods such as new kitchens and cars they otherwise could not afford, said Alan Clarke, a London-based economist for BNP Paribas SA, France's biggest bank.
'The only thing that has been supporting consumer spending growth is wealth gains from house price inflation,' Mr Clarke says. 'This is about to disappear.'
Lehman Brothers Holdings Inc economists in London predicted in 2005 that the surge in housing prices would begin to sputter that year. The housing deflation may have just begun.
In September, banks approved the fewest mortgages in 26 months. The decline came after the Bank of England raised its benchmark lending rate to a six-year high of 5.75 per cent in July.
The average cost of a home fell 0.6 per cent in September after growing at an average monthly rate of 0.89 per cent in 2007, according to HBOS. Banks foreclosed on 14,000 properties in the first half of the year, the highest number since 1999.
David Miles, Morgan Stanley's chief UK economist in London, says shocks to confidence like the run on Newcastle-based Northern Rock may cause house prices to fall further.
'Optimism about rising house prices has been an important driver of value in the UK,' Mr Miles says. 'Those expectations are potentially quite volatile and can turn round.' In October, the average cost of a home in England and Wales dropped 0.1 per cent to £176,100 from September. -- Bloomberg
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