UK can avoid US-style mortgage crisis

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The Independent Online

America's sub-prime mortgage crisis was only a bit-part player when recent market turmoil kicked off at the end of last month, but it has risen up the billboard since and now commands star billing.

Tuesday's Wall Street rout was sparked by concerns about the level of defaults faced by US sub-prime lenders - which provide mortgages to people with poor credit - after figures showed that late payments and home repossessions had surged to their highest since records began. Nerves were shredded further by news that New Century, America's second biggest player, is on the brink of going bust.

The shockwaves rippled across the Atlantic, sending the FTSE 100 index of blue-chip stocks plummeting by 160 points on Wednesday, its biggest one-day fall since last May, with bank shares taking the worst beating. But the big question for the FTSE is whether a similar sub-prime mortgage crisis is about to hit Britain.

There are several reasons for believing that the situation here is very different from that in the US. First, sub-prime is a much smaller proportion of the total mortgage market. Merrill Lynch has estimated that it was worth £25bn to £30bn in 2005, but the Council of Mortgage Lending puts the figure at a much smaller £15bn to £16bn, only 5 to 6 per cent of total lending. That compares with $830bn - about 10 per cent - in the US. Moreover, about half of UK sub-prime borrowers are classed as "low adverse" - that is, they do not have a history of significant payment problems.

Second, US borrowers have been caught out by a series of rapid interest rate rises, with borrowing costs leaping from 1 to 5.25 per cent in just two years. Here, interest rates have been relatively stable. Adding to the pain, many US sub-prime mortgages offer low rates for an initial "teaser" period - typically two years - before resetting to much higher fixed-term rates.

Third, house prices in the US are falling, leaving thousands of mortgage holders mired in negative equity and unable to sell their homes to pay off their debts. Here, the long-running housing boom remains intact. And fourth, lending criteria tend to be much looser in the US than they are in the UK.

Ian Giles, director of marketing at Kensington Mortgages, which pioneered the sub-prime market in the 1990s, said: "I am very confident that we won't see the same situation as the US. Borrowers in the US are much more indebted than they are in the UK and the market has also grown far more quickly than it has over here. The US lenders have had to adopt a relaxed attitude to lending in order to attract volumes and the products they sell are also riskier - over 50 per cent of their sub-prime loans are 100 per cent mortgages. In the UK, these products allow a maximum of 90 per cent and the average for us is below 80 per cent."

Jeremy Claridge, head of specialist mortgages at Alliance & Leicester, which entered the sub-prime market last year, said: "Structurally, the UK and US are two very different markets. Lenders in the UK are naturally quite cautious and prudent in the way they actually go about lending, such as limits on maximum advances and affordability tests. In the UK, there is also a predominance of fixed-rate deals which give longer periods of stability and certainty on payments."

But while the industry itself may be relaxed, some independent commentators are not so sanguine. Magnus Mathewson, an analyst at the broker Hichens, Harrison & Co, warned this week that the UK housing market was ripe for a fall because, like their US counterparts, British consumers are burdened with high levels of debt. "The resilience of the housing market may well be tested for the first time since the late 1980s and early 1990s," he said.

Neil Shah, director of research at Edison Investment Research, said: "Affordability is clearly stretched to a certain degree in the housing market. If it gets stretched further, there may be some issues here. My experience is that the credit cycle takes much longer to turn than anyone anticipates, so it will take two to three years for this ever to materialise in the UK and you'd require certain conditions for that to happen."

A recent report by the Council of Mortgage Lenders also flagged up some worries. It said there was a danger that lenders could miscalculate the risks involved, and the recent flurry of firms entering the market could intensify competitive pressure. There was also a concern that no one could be entirely confident of how sub-prime lending would perform in a housing downturn because the sector barely existed during the 1990s recession.

In the meantime, the Financial Services Authority is keeping an eye on the sector. Having ordered more than 200 sub-prime mortgage brokers to change misleading adverts late last year, it is currently looking into the industry's sales practices. But it refused to be drawn on whether it was concerned that America's woes would cross the Pond. "Obviously, we look at all the risks affecting our firms and we take appropriate action as needed," an FSA spokeswoman said. The Treasury is understood to be unconcerned about the sub-prime market, while the Bank of England refused to comment.

Despite the crisis engulfing the industry in the US, the UK market is tipped to keep growing. Figures from Datamonitor show 9.1 million people of working age were refused credit by mainstream lenders during 2005, a figure that is predicted to rise to 9.4 million by 2010.

Maya Imberg, a financial services analyst at Datamonitor, said the key for lenders was to assess their exposure accurately. "The US lenders started to go after market share and the possibility of a housing market downturn wasn't factored into their risk models because it hadn't happened for so long," she said. "A key lesson for UK lenders is that they shouldn't get carried away with acquiring customers. Sub-prime lending is all about risk management so it's important they make sure that they get their risk models right."

Price of London's richest homes soars 31% in a year

Bumper City bonuses and an influx of foreign buyers are driving up house prices in London's smartest areas at the fastest rate for 28 years, a report showed yesterday.

Estate agent Knight Frank said the average price of million pound-plus homes in prime central London areas such as Belgravia, Mayfair and Chelsea leapt by 2.6 per cent in February alone to stand a staggering 31 per cent higher than a year earlier. That is the highest annual rate of increase since 1979, and is triple that for the UK as a whole.

The Gatehouse, a penthouse in Uxbridge Street, Notting Hill, is one example of how prices at the top end of the market have soared. It was on the market two and a half years ago for £4.5m and failed to sell. It was put back on the market two months ago and was quickly snapped up for £6m, above guide price.

Liam Bailey, Knight Frank's head of residential research, said prices continued to be pushed higher by a chronic lack of supply. And while big City bonuses were another factor, he said the biggest boost had come from an increasing number of wealthy overseas buyers, especially from Russia, Italy, France, and the Middle East.

"Our forecast that prices in prime central London will grow by 12 per cent this year could well be an underestimate," he said. "Prices have already moved higher by 5.6 per cent in the first two months of the year and we expect that the next two to three months will see the strong market conditions remaining."

Jane Padgham

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