Friday, August 24, 2007

British Mortgages

Our friends across the pond are experiencing an 8-year high in foreclosures, according to this article in today's NY Times. Their housing market, like ours, has seen tremendous growth over the last few years, but in other ways, it's not so similar. I had no idea that only about 5% of British mortgages are fixed rate!
I have a friend who used to live in London and I talked to her a lot when she was in the process of buying an apartment a few years ago. She had a steady but not high-paying job, and only worked 4 days a week, so it was always tough for her to make ends meet. She had saved a bit of money by living in fairly horrible places for many years, and finally wanted to own a home and have more control over her own environment. She took advantage of some kind of "shared ownership" program-- basically, for those with moderate incomes who won't qualify for a large mortgage, an agency buys half your property for you and then rents it back to you. For her mortgage, she told me she was getting one with a fixed interest rate for 2 years which would then adjust every year thereafter. That worried me a bit, and I thought she was being scammed when she claimed it was a typical thing, but according to the NY Times article, that is exactly the kind of mortgage most Britons get.
Anyway, it worked out for my friend-- she only owned her apartment for about 3 years, and then sold it for a moderate profit, which she then converted to a much weaker currency when she moved to a different country. At the time, we thought she might have gotten out just in time, thinking the housing market there would start to slow down as it has here, but according to the article,

If there is a silver lining in Britain, it is that, unlike in the United States, home prices are still rising, for now, after more than tripling since 1997. Recent interest rate increases have yet to reverse the trend. In fact, the National Housing Federation recently predicted prices would rise 40 percent in the next five years, elevating the average price of a home, which already costs about 11 times the average British salary, to £302,400, or $618,000.
I wonder if the home price to income ratio is even worse in London-- I was always shocked when I'd visit there and look at home prices, in outer neighborhoods in North London that are somewhat equivalent to where I live in Brooklyn. For any New Yorker who wants to make herself feel that her apartment is spacious and inexpensive, real estate window shopping in London ought to do the trick!


mOOm said...

Yes adjustable rate mortgages have always been the norm in Britain. People got totally squashed in 1990 when interest rates went through the roof (I worked in real estate then). They dominate in Aus/NZ too. Wikipedia says that in Canada typically the longets fixed rate is 10 years. So the US is the outlier here.

Better quality housing especially on the space side relative to cost is a major reason to live in New World countries over Europe...

Fallibility said...

UK average house price to average income ratio is currently around 7:1 or so - still very high, but not quite the 11:1 forecast. As the market is slowing, I don't think we'll see it get to that.

The price:income ratio isn't exactly worse in London; yes, London has some very high priced property but also has a considerably higher average income than the rest of the UK. Those on low incomes struggle enormously - hence the social housing projects etc - but the average is probably worst in some of towns around London which are seen as 'desirable' by London workers.

And yes, adjustable mortgages are standard here in the UK - and they don't adjust annually, the adjustments occur every time the Bank of England changes the base rate. We are *just* starting to see US-style full-term fixed mortgages, but they are few and far between, and generally have a rather high interest rate.

Anonymous said...

The problem with fixed rate mortages in Australia is that they don't allow you the freedom to make large additional repayments.