Why are Bank Of Ireland getting into the UK at the peak?

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House Price Crash? What House Price Crash?

I’m not going to pretend to call the peak of the UK housing market, despite it’s inexorable rise that has gone almost unabated since the early 2000s.

But he UK market is shown in stark contrast to the Irish experience.

When the global economy hit the skids in 2008, the UK property market took a dive like every other western country. However within just 12 months, the market not only turned the corner – it rebounded like a rubber ball, topping over 15% year on year growth in early 2010.

UK House Prices 2009-2014 - Source: CityAM
UK House Prices 2009-2014 – Source: CityAM

The UK market has since had consistent growth for the last 5 years, averaging a fairly healthy 5% and even reaching a worrying 20% this year. However, there are a number of strong signs that the UK house price market is over-inflated, much like the Irish market in 2007.

UK House Prices Losing Their Stride?

new development yellow sign

In my regular trips to the UK I have been shocked at the number of new housing developments springing up in every corner of the country – advertised clearly by these little yellow signs at every roundabout directing the builder’s trucks and potential new buyers.

The building boom over there has been historic, particularly around the Home Counties surrounding London where demand for housing has never been greater. There were 122,000 new homes starting construction in February 2014, the highest since 2007 (BBC).

However, since the summer there has a decidedly quieter market across London and the South East, and some dissenting voices starting to show concerns as to the sustainability of the continued rise.

This week the latest construction data showed the weakest month in over a year (The Independent reports).

Last week Moneyweek reported on the Royal Institution of Chartered Surveyors survey of housing surveyors, many of them noting that house buyer interest and instructions had dropped off dramatically since the summer. The major house price indexes are also reporting similar news:

According to Halifax, house prices for the whole of the UK fell by 0.4% in October. Completed sales have fallen to their lowest level in a year. Rightmove registered an even bigger fall – it thinks that national asking prices fell by 1.7% from October to November.

Some have been calling it a “bubble primed to burst” (The Market Oracle) while cooler heads have taken the steady slowdown as a welcome ease of the pressure (Lenders and housebuilders dismiss talk of sharp house price correction – ThisIsMoney.co.uk).

So Why Is Bank Of Ireland Getting Into The UK Now?

In any rate, the UK market has been rising rapidly for over 5 years after a barely noticeable correction, unlike the Irish market which had a 60-70% correction with only about 10-20% recovery since then.

So why oh why is the Bank of Ireland announcing this week they are going into UK home mortgage lending in such a big way? Bank of Ireland looks to ramp up UK lending – The Independent.

There is enough desperate need for mortgage finance here in Ireland, and the market is at a far lower base where house prices look anything but over-inflated, even in spite of the last 12-18 months rises.

If you look at where house prices have come from in the last 7 years, comparing London with Dublin, I’d take my chances on the Irish market as a steady growth prospect, while the UK market might continue to see some gains in the new year but holds a huge amount of risk in that bubble finally bursting.

London v Dublin House Prices - Source: The Market Oracle
London v Dublin House Prices – Source: The Market Oracle

Despite what seems a bad idea, there are a number of reasons why Bank of Ireland would be increasing their activity in the UK:

  • Almost half of their lending is already in the UK. BoI lent plenty in the UK during the boom and that portfolio is probably their best performing asset now. Which makes it simple to increase their concentration on that market.
  • UK Economy is booming. The UK is outperforming all of the rest of the Eurozone, and with money flooding in from around the world, house prices have a strong reason to stay afloat.
  • UK House Prices more affordable that Ireland. This may be a surprise but as the FT recently reported, Irish household earnings have not kept pace with the return to strength of house prices in Leinster, while incomes in the UK have been growing healthily.
  • Government Mortgage Rules. Although only a threat so far, the potential for government intervention has affected demand over here. Even if the UK brought in similar regulations this year, they haven’t had such an effect on their house prices.

All in all, this means the UK is still a safer bet than Ireland for now. Until Ireland’s growing economy reaches the pay packets of your average housebuyer, and supply of properties for sale rises to create a fully functioning market, there really isn’t great profits to be made for the lenders here.

While they have a toe (or whole leg) in the water over the water, they might as well make hay while the sun shines.