The Great UK Housing Recession & Rebalance

Not sure if US-folks are tracking what is happening in the UK, but the housing situation has now put the UK economy in fairly serious danger.

Just to summarise:

-70% of bank lending in the UK goes towards mortgages

-Large chunk of Buy to Let (BTL mortgages) [these are people who are interest only and they arbitrage low interest with rental income and capital appreciation].

-2Y and 5Y fixes rising from sub 2% to over 6% (and increasing). BTL is even higher at 6.3% and 6.5%.

-These increases all happened during a very short time period (18 months)[Base BOE rate increased from 0.1% to 4.5% in that period]

-Covid related housing bungs created a large asset bubble since 2020 (+20% house values)

-We now have a set of people who borrowed heavily during covid to buy (5x income), that were not stress tested at SVR + 4% (they diluted the stress tests to make it easier for people to get mortgages)

-On the back of this we have material rises in the cost of food, energy, and transport (which eat into disposable incomes)

To me, it looks like the mother of all asset bubbles is about to deflate and cause some pretty serious economic damage over 2024 and 2025.

Two-year UK mortgage rate rises above 6% - Two-year UK mortgage rate rises above 6% | Financial Times via @FT

Direct support for UK households ruled out as mortgage rates soar - Direct support for UK households ruled out as mortgage rates soar | Financial Times via @FT

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Here in the US the 30-yr mortgage has gone from 2.65% in the first week of January to 6.69% today so we are up four points as well. I suspect fixed longer, fixed mortgages are more common here and have wondered when our asset bubbles are going to pop. Housing costs are coming down in the west, but not so much anywhere else. Zillow and Redfin think my house has gone up 5%-9% vs June 2022.

My first mortgage was for a small house at 6.75% in October 1998 and it wasn’t considered unusual at the time.

The longer-term nature of US mortgages is an advantage because you don’t get exposed to short-term volatility like in the UK. Its analogous to risk-pooling (this has many benefits in my view)

i.e.

Fix at 2% for 30Y (30Y) US vs 2% for 2Y (30Y) UK

After 2 years, the US person is still sitting at 2% still but the UK person needs to refinance for a new fix or be put on the SVR.

The UK folks are facing that problem now. Paying a mortgage at 2% that suddenly increases to 6+%.

For the US, you have the ability to just wait it out at 2% and let inflation deflate your fixed term debt.

I find the UK system absolutely bonkers to be clear. You are basically transferring all the risk to the person taking out the mortgage (who in many cases simply takes the cheapest fix which is usually the 2Y one).

Best that I’ve seen come through my BBC feed is that Prince William is going to be kicking of a multi-year project to address homelessness soon.

FWIW, the US also has a similar product: if the 30yr fixed rate is, say, 5.5%; you could find an adjustable rate at 3.75% (guaranteed for 2-3 years) and then it’ll “convert” to the risk-adjusted variable rate (which was often 1 or 2 percentage points above the available fixed rate).

I think what most consumers don’t take into consideration with refinancing is the additional fees for the new mortgage; which I think the finance industry is banking on if you pardon the intended pun

The situation in Canada is analogous to the UK mortgage wise except we are much further into the interest rate hiking cycle. (We don’t have Buy to Let programs though). Surprisingly there was only a small correction in Canadian housing prices due to the interest rate uptick and prices have resumed climbing recently. There is a tight supply of housing in Canada which seems to insulate the housing market from massive devaluations.

Just curious,

But what is the average house price to income ratio now in Canada?

The UK is kind of the odd one out due to also being exposed to supply shocks (energy), which Canada & US do not really have. Brexit was the final icing on the proverbial inflationary spiral cake (a problem the US and Canada also do not have).

As you know it can be misleading to use averages as the Toronto and Vancouver housing markets are so different from the rest of Canada. The average house price in Canada is about double that of the US while the average income is a bit lower in Canada vs the US. However a higher percentage of Canadians versus Americans own their own homes due to a more even distribution of income here.

The Vancouver housing situation is one of the most extreme in the world as this article points out.

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I had no idea the situation was that bad in Toronto and Vancouver.

I see that they have London at 8.0 (I am amazed at the relative difference between London and Vancouver now).

So I guess the same thing happens as in the UK (Bank of mom and dad step in for deposit help).

Worst is probably Oxford in the UK (approx 14.0 if I go by current metrics) but its a lot smaller than Toronto and Vancouver.

A better measure for Vancouver may be interest costs divided by income rather than property values in the numerator. I say this as there are a significant number of properties in Vancouver bought with cash by foreigners who declare little or no income in Canada.

Vancouver, like London, is a popular place for rich folks from certain countries to park their money or buy apartments for their kids who attend school here. That inflates the ratio of property values to income. Having said that, there is still a huge affordability problem here. However buyers have to be able to qualify for a mortgage at a much higher interest rate than what they currently commit to so I think the default rate may not end up being great. And most buyers have the bank of mom and dad to help out.

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2023 Des Moines median sale price 210K
2021 Des Moines median household income 74K
Ratio 210/74 = 2.84
Should be lower with the year mismatch, probably closer to 2.6-2.7

Just trying to get a sense for how high 8 and 14 are…

My kids can only dream of multiples like Des Moines!

The worst is my London daughter. She and her partner both work in the non-profit sector so don’t have the high incomes of financial workers in The City. Best they could buy was the ground floor of a house south of London.

My youngest daughter (nurse) and her husband (teacher) just bought a townhouse in a Vancouver suburb on a land lease: could not afford to buy land. My oldest daughter could also only afford a land lease townhome outside the city.

And all of the above involved significant parental financial assistance.

There is likely to be an exodus of young people leaving Vancouver because of affordability issues. We just don’t have enough high-paying jobs to meet the cost of housing.

Des Moines certainly cheap compared to large U.S. cities on the coasts:

Land lease? Have not heard of the term before.

Is that similar to leaseholder (vs freeholder) over here in the UK?

Whats it like in rural england? Looking at estates.

Reading this just reminds me to be thankful we refinanced our house the summer BEFORE rates started going up. 2.75% Fixed 15-year!! :party:

Took out enough for the new roof and to pay off the replacement windows, garage standalone heat pump, and attic insulation layer.

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Yes. I didn’t use the leaseholder and freeholder terminology as I expected you would be the only other person on this thread familiar with those expressions

Whats it like in rural england? Looking at estates.

1.875% here! Only on a 7/1 ARM, however, but as of 2020/03 when we refi’d I had 23.8% equity in the home (based on purchase price, much more in truth) and 3.25 years in I have 41.9% equity, I’m not too worried about the jump once the remaining principal is under 40% after 7 years.

My first mortgage was around 6% in 2003. That rates are slightly above that and looking at my first house on zillow being up about 60% over 20 years does not seem to suggest there is a massive bubble.

Given WFH driven by covid, i wonder if Americans are extending the length of time they keep their cars in exchange for buying that house with the home office.

You can buy the Castle Estate we got married at:

That will be a cool £50 million. :slight_smile:

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