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The next subprime crisis?

On Twitter I got involved in a conversation about the regional disparity in property prices, and where the crisis had started. This then highlighted the similarities of the US sub-prime crisis and the current housing market and policy in the UK.

The subprime crisis began with as the housing market in the US was bubbling, and borrowers with limited or poor credit histories were lent amounts that would be unable to meet if circumstances changed. Mortgage brokers were pushed to lend more, as the debt was repackaged into mortgage back securities (MBS) and collateralized debt obligations (CDO). This was sold by banks, as high quality debt, with different tranches, which in theory protected the investor from loss, on the premise that house prices didn’t fall.

The property market in the UK is regularly covered in the media, primarily the price of property in London. The issue of affordability (or unaffordability) for first time buyers is a highly politicised issue, with the current government launching their Help to Buy Scheme.  In essence the government helps FTB access the housing market by guaranteeing a 20% loan, which allows the buyer to only put down 5%. The similarities of the UK and the US as banks’ are lending to borrowers at the riskier end of the scale, with minimal deposits. 

London has different traits to the rest of the UK, and the prices rises are limited when inflation is considered.  The gentrification of some zone 1 and 2 areas, is due to a change in lifestyle choice, people generally marrying and having children later as they focus on careers and living closer to their work. There are other factors such as foreign nationals purchasing second properties or investments in prime postcodes, and the limited supply and increasing demand.

I believe that the governments help to buy scheme, will push up prices over the next 2-3 years with this being unsustainable outside of London, if there isn’t a significant increase in economic growth. For London’s property prices to become more affordable, the government should focus on supply, rather than inflating demand. 

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