Britain's lopsided property market

This is the second in a three-part series about the state of the UK economy, and the disparities between different peoples’ experiences. It covers the property market, and you can see the video associated with it here.

Where are Britain’s most expensive – and least expensive – house prices to be found?

Top five postcodes for house prices

Bottom five postcodes for mainland UK house prices

Source: Hometrack

Stroll through central London and glance in estate agents’ windows and you wouldn’t have guessed that Britain in the midst of a property crash. Prices in the smartest parts of town are still rising at a rate of almost double-digits. Property is so scarce that some of it is still being bid for by multiple buyers.

Indeed, if you were to look merely at London, prices are indeed still higher than they were at the start of the crisis in 2008. However, the rest of the country is another story entirely. Homeowners in some British regions have seen a property slump of historic proportions. Hundreds of thousands are in negative equity; many have horrifying stories.

In the New Lodge district of Belfast, house prices have fallen even further than the 45% rate they’ve dropped by in broader Northern Ireland since 2007. A few years ago, teaching assistant Anya Conner’s home on Stratheden Street was valued at £163,000 at the peak. At its most recent valuation some months ago it was worth only £76,000. It has most likely fallen since.

Like many who see quite such a steep fall in their house price, Anya is in negative equity: her mortgage is for £112,000. That wouldn’t be a problem in normal cases: negative equity is only a problem if you want to move house, and then have to realise that loss, and pay it back to the mortgage company.

However, Anya’s home is set to be demolished and redeveloped by the local housing authority, so she is facing a compulsory purchase order. Because the price she’ll get given will be the going market value, Anya will, if it goes through, be facing debts of £30,000 or more. She will never be able to get back on the property ladder again, she tells us. Bankruptcy might be the only option.

Property market crashes, like recessions, are most traumatic for those caught in them and who suffer collateral damage. Those who work long and hard hours to save up for their deposit (it took Anya two years to save up the £5,000 she needed 11 years ago), but who fall victim to a sharp fall in prices.

There has been a real and very vicious property market crash in Britain. Northern Ireland was worst-hit, but no region other than London has stayed afloat: in the North East they’re down by more than 10%, in Wales by 6.4% – and these prices aren’t adjusted for inflation. On a real basis, prices are down even further.

Another reason why there hasn’t been as much talk about the housing crash as there was in the early 1990s is that the symptoms haven’t been as evident. Rates of repossessions, numbers facing mortgage difficulties, have been far lower than back then. There’s one obvious explanation for this: interest rates are far lower: the recession of the early ‘90s was sparked by Black Wednesday and the then Government’s desperate efforts to keep Britain within the Exchange Rate Mechanism, the cost of which were double-digit official interest rates.

This time around, with official interest rates down at 0.5%, homeowners are at least spared the kinds of mortgage shock they experienced last time around. However, this does mean that, in the same way as Japan was plagued by “zombie banks”, Britain is likely to face a problem with “zombie households” – families who are still, just, able to pay their mortgages, but who are barely keeping above water.

The second reason repossessions are so rare in comparison to the early ‘90s is that they look very different this time around. As we travelled the country and spoke to households from all over Britain, we encountered two other ways some families are facing the threat of losing their home.

One is something called an Assisted Voluntary Purchase agreement. Under this relatively new scheme a homeowner who’s unable to keep up mortgage payments can come to an individual deal with his or her lender to sell the home. If there’s a shortfall, the homeowner may then end up owning the mortgage company a sum for a period of time. Such deals are becoming increasingly common, according to auctioneers Allsop, and although they are a kind of forced sale, they do not count as a repossession in the Council of Mortgage Lenders’ statistics.

Another alternative avenue is the route taken by Gerald Mears of Caerphilly in Wales. When the economic crisis hit his business and he found himself unable to pay his mortgage, he was served a repossession order. He and his family kept their bags packed for a year as the sluggish process worked its way through. But just as it looked as if he and his family would be out on the streets, he was told about a local program called a Mortgage Rescue Scheme. Under this, the local housing executive would buy his home from him, clearing his debts, and he and his family would be able to remain at home – this time as tenants rather than owners.

It’s an unusual situation, but for Gerald, who was burdened by debts he simply couldn’t pay – and was working 60 hour weeks simply to try to keep up payments on his mortgage, credit cards and overdrafts, it was a Godsend. The problem is that such deals are relatively scarce, and are likely to become scarcer as councils are cutting the funding for them, as they try to make austerity cuts across the board.

What is also markedly different from the early 1990s is the extent to which banks seem willing in this episode to give their borrowers some extra leeway to pay their bills. Whereas in previous crashes the banks were often quick to repossess, this time they are quicker to offer forbearance to struggling borrowers. It’s likely to be a both a business judgement (sometimes it’s better not to put an underwater property on the market, and to find some way to get an existing tenant back to financial health) and a strategic one (banks realise, in the wake of the crisis, that if they are seen as excessively heartless they may face even greater regulation)

It’s only when one encounters such examples that you realise that the story behind the housing market goes far deeper than those relatively positive repossession figures. There is a crisis, but it is a muffled crisis – and in the meantime the London property market booms. As with so much else in the UK economy at present, this really is a lopsided recovery.