Residential mortgage-backed securitisation data shows the UK housing market has weathered the turbulence since the crisis better than the US and the rest of Europe.
Standard & Poor’s research on RMBS issues shows less than 5 per cent of UK RMBS transactions have been downgraded since the financial crisis. This is in stark contrast with RMBS transactions originated in the US, of which about 45 per cent have been downgraded, reflecting the performance of loans within the pools that make up the issues.
A big contributing factor to the performance of these bonds in the US was the reckless lending practices that ultimately made it difficult for many people to stay in their homes when the economy began to nosedive.
Home Funding chief executive Tony Ward says: “There are various reasons UK RMBS have outper-formed their US equivalents. In the US, the financial services market was deregulated to allow more people to access financial products.
“At the same time, the government was promoting homeownership for the masses. It eased up on planning regulation, making mortgages available for a proliferation of new building across the US and in the march to get market share, US lenders were doing all sorts of things to lower their credit criteria.”
Industry consultant Jonathan Cornell says US lenders, especially those that specialised in sub-prime lending, offered borrowers low teaser rates, which would become much more expensive after a certain period of time.
Cornell says: “What would happen over here is a person would have a fix or tracker but would then revert to a standard variable rate, which in many cases was actually lower than the initial payment. It shows things were not quite as bad in the UK as people tend to make out.”
Unemployment in the US doubled from 4.6 per cent to 9.3 per cent between 2007 and 2009 and has hovered around that figure since, whereas the UK saw a less dramatic rise in that time, from 5.5 per cent to 7.8 per cent.
This has contributed to the higher number of repossessions in the US, which is demonstrated by the performance of its RMBS sector.
Capital Economics chief property economist Ed Stansfield says this shows the UK labour market has been more flexible than its US counterpart, enabling people to stay in their homes.
He says: “The level of arrears has been far greater in the US. That is a sign that perhaps the employment market has become more flexible in the UK, in terms of the use of temporary and part-time labour and in the sense that workers have been willing to sacrifice a bit of their income or income growth to retain their job.”
Citigroup Global Markets head of European securitised products research Gordon Kerr claims UK issues have also performed well compared with their European equivalents, largely as a result of the damaging effects sovereign debts are having on EU economies.
Kerr says: “The Dutch market has also held up well but the Italians, Portuguese, Irish and Spanish have all suffered because of what is going on in their economies.”
UK borrowers have been supported by record low bank rate of 0.5 per cent since March 2009 and relatively stable house prices in recent years but the sovereign debt crisis in the eurozone has spread fear throughout the market.
As a result, some UK lenders have started to increase the price of their mortgages as the difference between Libor and the base rate has increased, reflecting diminishing confidence.
However, the situation could become much more serious for UK borrowers if Italy, the eurozone’s third-biggest economy, needs to be bailed out.
Kerr says: “The bigger worry at the moment is how long rates are going to stay low and if banks are going to raise the cost of mortgage borrowing marginally because of the cost of funding if the eurozone crisis carries on the way it has been.”
Precise Mortgages managing director Alan Cleary sees this as a pivotal factor in determining how well the UK’s housing market will perform in the future and if it can continue its relatively stable performance in recent years.
He says: “The world could change in 24 hours, meaning that predicting the future health of the market is difficult. If the euro destroys itself, then all bets are off.”