As the US and UK seem to be exhibiting similar economic trends the ‘rationale’ follows that experiences in the US and UK housing markets will be very similar. After all, both countries had long sustained periods of house price growth, both experienced increased diversity in products including large sub-prime sectors and both countries had a large scale dependence on capital markets to fund products.

 

If you look at housing market trends post Q2 2007, again they appear parallel in almost all respects. Both countries have/are seeing large scale property falls , obtaining mortgages for properties is much more difficult and the specialist sector has disappeared. It should therefore follow that the performance of actual mortgages should follow suite, right? No, Wrong.

 

 

The implicit flaws of the ‘slippery slope’ argument

 

The ‘follow the leader’ argument simply doesn’t apply to the two housing markets for a whole host of reasons including:-

 

·         Very different housing markets in terms of complexity, relative over/under supply and social housing provisions;

·         The quality of mortgage business written in later years of the housing boom and the impact of regulation (the US mortgage market was largely unregulated at a retail level);

·         The role of capital markets in funding and the relative structuring of mortgage securitisations (the US was much more dependent on capital markets for funding); and

·         The difference in national psyche

 

You may think that the last point is rather obtuse. However, experience shows this last point to be probably the most important of all. If you have two customers on either side of the ‘pond’ experiencing the same circumstances the ‘rational’ results on average should be same. The simple reality is however very different. This isn’t just a UK versus US argument:  it is an argument that applies to any two countries you care to compare.  

 

In a previous role I worked extensively in Holland , Germany and Italy and one of the earliest conclusions I reached was that taking one business model that works in one country and transposing it in a different jurisdiction doesn’t work. You have to adapt to the different legal requirements, the different distribution and processing requirements, the different customer requirements but most of all the different consumer behaviour. They don’t just speak in different languages in foreign countries, they think and behave in fundamentally different ways.

 

 

The evidence of the increasing disparity between the US and UK

 

If you aren’t convinced of the level of disconnect between the credit performance of the US and UK housing markets, have a look at some of the statistics:-

 

Repossessions or foreclosures

 

The CML is anticipating some 75,000 repossessions in 2009 in the UK. The US had 290,361 foreclosures in Feb this year alone (RealtyTrac) up 6% on January levels.

 

Given the population differences if we look at the levels of anticipated repossessions in 2009 by percentage by annualising the US February figures (which could well underestimate the numbers) we get the following picture:-

 

 

 

 

 

 

 

 90+ days arrears and cases in litigation;

  

UK arrears for all borrowing total approx 1.95% of outstanding balances (CML). US arrears for prime borrowers only totalled 3.74% (Source: Mortgage Bankers Association). US sub-prime 90+ arrears and cases in litigation total an almost unbelievable 23.11%! Given that approaching 1:4 loans at the height of the US market was sub-prime, this perhaps goes a long way to explaining the above graph. When you combine 90+ day arrears and cases in litigation for all loan types, you get the following picture:-

 

 

Whilst performance continues to deteriorate on both sides of the pond, even the most negative commentator cannot fail to draw the conclusion that the performance of the two markets is in no way linked.