What caused the real estate crisis in London

Real estate crisis: Now house prices are falling in England

After the USA, the real estate market in Great Britain is now also rushing into the depths. Experts anticipate a significant drop in consumption. The British home market has been in crisis since September last year. On average, the prices of residential real estate have fallen by 0.3 percent per month since then. In March, the loss in value took on dramatic proportions with a minus of 2.5 percent. The latest statistics from mortgage lender Halifax are not only frowning upon millions of heavily indebted UK homeowners. Even Prime Minister Gordon Brown recently expressed concern in front of the SkyTV cameras: "We have to make sure that people regain confidence in their mortgages and that we guide the economy through difficult waters."

Brown has outlined the potential danger well, says Oppenheim analyst Katrin Löhken. “Falling real estate prices are depressing consumption because people feel poorer and are saving more.” According to surveys by the British opinion research institute GfK NOP, the crisis on the home market has significantly dampened the mood among consumers on the island. More and more Britons are putting off purchases of consumer goods and putting their money on the high edge.

This could have serious consequences for the German export industry. In 2007, local companies delivered goods worth a total of 71 billion euros to the United Kingdom, according to the Federal Statistical Office. This makes Great Britain the third most important export partner for Germany after the USA (73.4 billion euros in export volume in 2007) and France (93.9 billion euros), which were also hit by a real estate crisis.

There are hardly any buyers left

There is no end in sight to the downward trend in the UK property market. On the contrary. International Monetary Fund experts fear that the crisis may not have really started yet: "The prices of British homes could fall to a similar extent as in the US," is their negative scenario. Accordingly, the landowners on the island would have to be prepared for further losses in value of at least ten to 15 percent.

The core problem: there are hardly any buyers left. On the one hand, this is due to the British banks, which have turned off the lending taps. Investors are no longer buying securitized mortgage loans from the institutes since US real estate loans to property buyers with low credit ratings, known as subprime customers in banking jargon, have burst in a row. The association of British mortgage lenders, the Council of Mortgage Lenders (CML), has recently even been compelled to ask the central bank for help with an alarmingly worded appeal. "If the Bank of England does not provide the mortgage banks with liquidity, the loan volume this year will halve compared to 2007," warned CML chairman Steve Crawshaw. In 2007, mortgage loans with a total value of 108 billion pounds (134.6 billion euros) were granted on the island.

But even if the credit taps were opened, few Britons would be able to buy real estate at current prices. "In Great Britain, house prices in relation to average income have risen extremely in recent years," explains Oppenheim analyst Löhken. Whereas in 2000 a family only had to raise an average of 3.25 annual salaries for the purchase of a property, in 2006 it was almost 5.5 annual salaries. Löhken: "In the past, there were real estate crises every time the affordability of houses had become so difficult."

Correction is a natural response

Tobias Just, real estate analyst at Deutsche Bank Research, assesses the situation in a similar way: "The correction on the British real estate market is not a result of the US subprime crisis, but a natural reaction to the exaggeration in previous years." That home prices on the island are not rising endlessly experts have long known. Just: "The crisis did not come as a surprise."