Light at the end of the Housing Tunnel? Interviewer: Toby Thompson Interviewee: John Glen September, 2008 TB: John Glen, you are a Senior Lecturer in Economics, what is the link between the UK and US housing markets? JG: Well, I think most people will be aware, Toby, that the US housing market has experienced hard times over the last twelve months, with a large number of people defaulting on their mortgages. Unfortunately a number of UK banks had effectively purchased those loans off the US banking system, so that essentially means that UK banks are exposed to the defaults that have happened in the US housing market, so that the moment we have situation where the UK banks have poor asset quality on their balance sheet and that is affecting their ability to make loans in the UK housing market. So we now have a situation where the UK housing market is characterised by a lack of liquidity, a lack of willingness to make loans and therefore the UK housing market itself is in decline. TB: So for first time buyers, when will they return to the market? JG: First time buyers have been particularly hard hit by the credit crunch and by the lack of willingness as it were on the part of the UK banks to lend to them. So essentially we have a situation where banks are requesting first time buyers to put down a bigger proportion of the selling price of the house as a deposit, the Council of Mortgage Lenders announced last week that first time buyers are now having to put down approaching 15‐20 per cent of the house price as a deposit and they haven’t had to put those deposits down – or deposits of that extent down – since the early 1980s. So we have situation where they are required to have a larger amount of funds in order to make the purchase. There is also a situation where first time buyers are worried about increasing unemployment and therefore are reluctant to take on debt, and also first time buyers exist in a market where they perceive prices to be falling and where individuals perceive prices to be falling, they will be worried about going in, buying an asset which is then going to fall in value very soon after you have purchased it. TB: So should first time buyers wait? What is your advice to first time buyers? JG: My advice to first time buyers would be that if they do have a deposit, if they are able to negotiate a loan for themselves with a bank – and I admit that that is extremely difficult to do at the moment – they should be aware that they are in an extremely strong position. There are lots of people who are trying to sell houses out there, particularly a number of the big house builders who have been in the news recently and we all know are struggling at the moment, and therefore there is value to be had in the market and therefore, if I were a first time buyer who had decided that they wanted to go into the market at this point in time I would be aware of my negotiating position and I would negotiate very hard in terms of the price that I actually paid for the property that I wished to buy. And also first time buyers need to take a longer term perspective. Whilst it is the case that house prices may still have a way to go in terms of prices falling, it is likely that those prices will start to bottom out, as it were, at the end of 2009 and we start to see prices increasing into 2010. TB: So the market can improve shortly, do you think or is that a long way off? JG: I think the market will start to improve into the end of 2009. The primary reasons for that are that we assume that the credit crunch works through and therefore liquidity starts to return to the banking system and the banks are willing to make loans to people who wish to purchase houses. It is likely to be the case that UK inflation will fall into early 2009 and with that we are likely to get reductions in interest rates, as we get reductions in interest rates that is likely to make houses more affordable and therefore people will return to the market. And it is also likely to be the case that into the end of 2009, early 2010, we will see growth returning to the UK economy, as growth returns to the UK economy people will be more optimistic about their employment security – about employment opportunities generally – and therefore will exhibit a greater willingness to return to the housing market. TB: John Glen, thank you very much. JG: Thank you.