What can UK property buyers learn from the US housing market boom and bust?
Broadly speaking, UK property buyers can learn a lot from the US housing market boom and bust. Primarily, that such a thing is still possible in the modern world of financial regulation (or lack thereof). Secondarily, that the vast majority of market players – here we mean buyers, seller, mortgage lenders, banks, financial advisers, property managers etc. – can continue to treat the situation as continuing growth without any sense of acknowledgement that busts do happen, and that they usually happen against a backdrop of shocked and shamefaced economic experts. In a documentary released three years after the US financial crisis, many of the key economic players admitted in courts of law that they knew what they were doing could have grievous effects. But if you are an average property buyer who is buying only your first or second home, what can you learn from the wheeling and dealing that led to the US crash?
First, be aware that incredible numbers of families were evicted and their houses repossessed during the crash: not because of a raft of extraordinary circumstances; but because of fairly ordinary circumstances. Alongside the bust, many thousands of American workers lost their jobs, and couldn’t keep up with loan repayments. The fault wasn’t with them so much as with mortgage lenders that were successively offering riskier and riskier loans to homebuyers. Mortgage lenders were able to do this at a profit because so much of the risk in the US property market was several times removed and displaced. The eventual vulnerability to the inevitable loan defaults passed through several hands as packaged risk investments until those packages were sold to individual pension investors with an unmerited credit rating. The take-away from all this? Don’t assume that a lender who seems more generous is offering you the best loan for your situation. London housing prices have skyrocketed to record levels, but as far as possible, don’t overstretch your ambition to rely on your best-case economic scenario over the next twenty years. Leave yourself some room to breathe and bounce back. Use this online mortgage calculator tool to figure out what your cautious and extended price ranges might be.
Since the global financial crisis, London property prices have soared by an average 40%. But this incredible boom in housing sales hasn’t been matched by wage inflation. UK nationals have apparently been compensating for this partially by spending a higher proportion of their growth-stunted incomes, and saving less money than ever before. But this is inherently unsustainable. A higher disparity between average wages and average house prices will inevitably increase risk of more loan defaulters. The situation here is certainly not as severe as it was in the US, partly because our risk-selling industry is marginally more regulated than the US sector, but UK homebuyers would do well to either budget for a mortgage well within their means, or, if they can wait, postpone buying for the next couple of years while that disparity closes.