One of the UK’s largest house builder today predicted that the UK housing market will remain strong in 2007. Bovis Homes Chairman Tim Melville-Ross said "Looking ahead, it is anticipated that the under-supply of new housing relative to new household generation will continue," said Mr Melville-Ross. "When this is allied to household growth, driven by demographic and societal changes, that is in excess of supply, then robust market fundamentals remain in place."
Bovis certainly had a good year. Its pre-tax profits for 2006 rose by 13.7 percent to £132m. Revenues rose 14.6% to £597.3m, on the back of an unsustainable housing bubble in the UK. Extrapolating from the past, the future just looks better and better. Profits will be piled upon profits as the luckless British public pay out ever increasing proportions of their income servicing mortgage related debt.
The UK property market is probably the most overvalued in the world. Last year, property prices increased by over 10 percent while personal incomes increased by just 3.7 percent. The bubble is fueled by the usual mix of lax lending standards, and delusions about eternally increasing prices. The local mortgage lenders are offering products that would make New Century, over here in the US, look like a prudent and respectable financial institution. In some parts of the UK, housing loans based on a ratio of 5 times salary are the norm. Say good-bye to the “no money down” loan and say hello to the 105 percent loan. Mortgage lenders are prepared to extend loans that starts the new homeowner out with at least 5 percent of negative equity.
However, there is a storm cloud gathering that might yet rain on Bovis’s brilliant future. Inflationary pressures in the UK are building up, and interest rates are now creeping northward. Here, the experience of the US provides an invaluable lesson, and it is a simple one. It doesn’t take a massive hike in interest rates to generate a collapsing housing market. All you need is over-extended borrowers, lax lending standards and the sudden realisation that house prices can not outstrip income growth forever. After that, it is just pain, misery and despair.