Mortgage & Housing

6 November 2007

Managing director, Worldwide Financial Planning, Writes:

In response to my column about house prices, many of you asked about the US housing market and what impact that may have here…

The US housing market has no real impact on the UK housing market. The issues there are well documented in terms of plummeting house prices and a stagnant market.

Sometimes the bubble has to be really big before sense is seen. The US market is way ahead of the UK in that their fiscal policy of rising interest rates began some time before the UK. Whilst the US rates rose to slow the economy, the lower rates here continued to fuel an already obvious bubble.

Northern rock’s situation was blamed on the credit crisis in the US and politicians nodded their head in agreement. Why?

Let’s take a look at the horrible situation in the US versus the UK:

I listen to news flow coming from the UK and wonder where they get the information from. House prices rose x% in October. Whilst I mentioned it before, one house sold for £2,000,000 doesn’t represent an average, and we need to look closer at the amount of completions. Most agents I speak to, complain of poor flows through the door. They aren’t getting the viewings. We are in a buyer’s market. In June the land registry notes a 15% drop in completions in comparison to the same date last year. (1) The writing is clear.

I now read about repossessions soaring and then I read about over 1 million people in the UK who are using their credit cards to pay their mortgages! (2)

The bubble is growing.

The potential problems in the UK are uncannily similar to the US, only much worse:

House prices in the UK are high by any standards. Household saving stands at just 3.1% of disposable income! Overall financial deficit for the UK is at a staggering 7% of disposable income. These figures are not nice reading. (3)

Further weaknesses are obvious: From 1996 until its peak ten years later, the index of US house prices rose by 127% in real terms but the FT’s index for property was up 144% until the third quarter this year. (3)

According to the organisation for economic co-operation and development, the US price to rent ratio for housing was 36% above its average, whilst the UK is 66% higher. (3)

US mortgage debt was 104% of gross domestic product whilst the UK is 126%. Total US household debt was 140% of GDP at 2006 whilst the UK was 164%. (3)

Lastly the ratio of household debt to GDP soared by 37 points between 2000 and 2006 but the UK’s was a staggering 50%. If you think the US is struggling to breath, the Uk is choking in debt. (3)

I attended a seminar recently where someone said: ‘but we have housing shortage’. Do we? How many people do you see queuing up with cash?

What we have is a shortage of quality homes and also affordable homes. Goldman Sachs also commented that if supply and demand was driving prices, the rise in rents and house prices should be similar. The same scarcity of prices should increase rents and house prices equally. They commented that in fact net rental yields had halved in the last decade. They also concluded that house prices must fall by 20% for there to be an appropriate historic relationship between the two. (3)

But what difference does it make anyway?

None really, since the value of your house should not contribute to an estimate of your net wealth. It shouldn’t affect spending but undoubtedly it will, as any feelings that you could have a net debt (negative equity) would sure send panic into the spending system.

The pre budget report has pointed to there being a much closer relationship between house prices and the increase in the nil rate band for Inheritance tax – that’s a bit late, just as we move into a falling market. Another interesting stealth tax.

In between times consider your exposure to the housing market via multiple properties. It may be time to lower that, particularly in light of the new capital gains proposals. 


If you have a financial query call Peter on 0800 0112825 or e-mail info@wwfp.net and take a look at our section on mortgages.


Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up. 


(1) Land Registry
(2) Shelter
(3) Financial Times