Image: Jennifer Wilson
Jason Cumming  /
Jennifer Wilson admits she viewed purchasing her tiny ground-floor apartment in Edinburgh, Scotland, as "a license to print money." But the fallout from the U.S. sub-prime crisis has now hit Britain, starving the housing market of buyers and sending property prices plunging.
updated 4/1/2009 8:14:44 AM ET 2009-04-01T12:14:44

Glancing at her mortgage bill, Jennifer Wilson can’t help but lament that a portion of her monthly payment covers the cost of her dalliance with decadence.

Like many 20- and 30-something Britons swept up in the country’s recent consumer-spending and property boom, Wilson found lenders happy to provide her with enough cash to buy an apartment — and far more.

Now, she’s feeling the pinch.

When she sought 90,000 pounds (about $130,000) to buy a cozy one-bedroom flat in Edinburgh in 2005, Wilson’s mortgage broker told her she was eligible for up to another 75,000 pounds (about $108,000).

“They tried to throw money at me,” said Wilson, who works as a manager in Britain’s publicly funded National Health Service. “In the end, I took an extra 2,000 pounds and spent 1,500 pounds of it on a girls’ weekend in New York.

“I thought I was Carrie Bradshaw. We went on a ‘Sex and the City’ tour and shopped for designer clothes. But every month when I get my bill, I feel ill when I think that those clothes are now part of my mortgage.”

New realities
Raised in an era of overwhelming affluence and conspicuous consumption, a generation too young to have weathered Britain’s last recession, in the early 1990s, is now facing the realities of very different way of life.

The devastating fallout from the U.S. sub-prime crisis has had a big impact on this side of the Atlantic. The credit crunch has starved the housing market of buyers, sending prices plummeting. Hundreds of layoffs are being announced daily.

It wasn’t supposed to be this way. Gordon Brown, now Britain’s prime minister after being in charge of the country’s monetary policy for a decade as finance minister, famously claimed in 2006 that there would be “no return to boom and bust.”

Many homeowners and young professionals bought into his bold prediction, taking advantage of soaring property prices and a strong currency to embark on extravagant lifestyles featuring the latest fashions, frequent foreign vacations and expensive dinners at restaurants run by celebrity chefs.

Excess became a way of life for many Britons. Greed became good. 

Dangerous game
In Edinburgh, where even the previous recession hadn’t stopped home prices from rising during any month since 1971, the so-called experts insisted that you simply couldn’t lose money in the property game.

And when that 37-year streak came screeching to a halt in August, with average home prices in the city dropping 6.5 percent year-on-year, it was clear that Britain’s property bubble had officially burst.

The government-set base interest rate has been slashed six times since October and now sits at just 0.5 percent — the lowest in the Bank of England's 315-year history. But, haunted by the fresh memory of toxic assets, most British banks are unwilling to lend to anyone who can't come up with a 20 percent down payment, the equivalent of about 30,000 pounds ($43,000) on a typical home.

It’s a far cry from the height of the property boom in late 2007 when many lenders were offering would-be home buyers mortgages of up to eight times their annual income.

But by early 2008, as the credit crunch bit, such extravagances — including the popular 125 percent mortgage (typically a 95 percent mortgage with a 30 per cent unsecured loan on top) — vanished from the market.

'We all got greedy'
The decline in credit has sucked the air out of the market. Three apartments in Wilson’s tenement block are currently for sale but buyers are nowhere to be found.

Video: In Europe, things are tough all over Sitting in the cramped living room of her ground-floor home in Edinburgh's Leith area — a port neighborhood grittily immortalized in Irvine Welsh's cult novel "Trainspotting" that today features many trendy bars and restaurants catering to an upwardly mobile clientele — Wilson admits that she that was “arrogant.”

“We all got greedy,” adds the straight-talking 33-year-old who had a modest upbringing in a nearby commuter town. “I thought buying a flat was a license to print money.

“I spent 90,000 pounds on a flat where I can walk from my kitchen to my bedroom in five steps. Now I’m terrified. My flat is unsellable.”

The constant doom-and-gloom is so bad, says Wilson, that she has stopped watching the TV news.

“I’ve seen so many friends lose their jobs,” she added. “I can’t believe I would spend three pounds every day on coffee at Starbucks. I’m appalled that I used to be so decadent.”

It’s little wonder Wilson avoids the headlines — the economic statistics have been increasingly dire:

  • A study by real estate firm Knight Frank found that the U.K. had the second-highest rate of price decline for properties in the developed world last year (only Latvia fared worse). Nicholas Barnes, its head of international residential research, said it was “virtually impossible” to predict how much further the property market would fall during 2009.
  • Government figures show the British economy contracted in the fourth quarter of 2008 at its fastest rate since 1980, the year after the gloom-laden “Winter of Discontent.”
  • In a country with a population of about 61 million, the number of unemployed people increased by 421,000 during 2008 and breached the 2-million mark, according to government statistics. A tally compiled by the Daily Telegraph shows that companies have confirmed more than 79,000 jobs losses since January. The U.K.’s official unemployment rate is now 6.5 per cent. (The U.S. unemployment rate rose to 8.1 percent in February.)
  • The U.K. government has spent 585 billion pounds ($835 billion) bailing out financial institutions. First, it nationalized mortgage lender Northern Rock last year after its bid for an emergency loan sparked the first run on a British bank since Victorian times. The British taxpayer now also owns majority stakes in the Royal Bank of Scotland and Lloyds Banking Group. (In February, the Obama administration reportedly put a $2.3 trillion price tag on its Wall Street bailout plan. Given that the U.K has a population only 20 percent of the U.S., the British financial bailout is almost twice as big per capita.)
  • According to Nationwide, Britain’s second-largest mortgage lender, the average price of a home dropped by about 30,000 pounds ($43,000) — or 14.7 percent — during 2008. In London, home prices dropped by 15.1 percent last year, with the annual price decline hitting 33 percent in Belfast, 17 percent in Bristol and 6 percent in Edinburgh. (The Federal Housing Finance Agency's House Price Index showed a 9.6 percent U.S.-wide decline last year.)
  • Last month, the government announced plans to pump up to 75 billion pounds ($107 billion) into the ailing economy by “creating” new money in a bid to spark economic activity. (In February, President Obama signed a $787 billion stimulus plan into law. This in addition to the $152 billion stimulus package doled out by the outgoing Bush administration in 2008.)
  • In February, market-research company GfK NOP predicted that 5 million U.K. homeowners will be “underwater” — owing more on their homes than they are actually worth — by the end of this year. The firm said that one-in-three of the 11.7 million British mortgage holders were already in that situation. (A study released last month by First American CoreLogic suggested that one-in-five U.S. homeowners were "underwater" at the end of 2008.)

Tidy profit
The boom and bust has been repeated in almost every corner of the United Kingdom. In Birmingham, England’s second-largest city, communications consultant Jo Dain received a 125 percent mortgage from Northern Rock to get on the property ladder in 2003. She used the extra cash to pay off student loans and credit cards.

And when she sold her one-bedroom apartment in 2006, Dain made a tidy 30,000-pound ($43,000) profit.

“It was so easy,” Dain recalls. “I went from a situation in three years where I had 7,000 pounds in debts to making 30,000 pounds. It didn't feel real at the time.”

With the proceeds of her property profits burning a hole in her pocket, the self-confessed “fashionista” shopped until she dropped for dresses, handbags and shoes. She went on a five-week vacation to Australia, splurged at a five-star resort in Barbados for three years running and visited Spain, Hong Kong and Singapore.

Image: Jo Dain
Courtesy of Jo Dain
Jo Dain went on regular vacations in Barbados after making a $43,000 profit on a property she had owned for three years. However, she is now struggling to sell her latest apartment.

“I just tended to look at it like Monopoly money,” said Dain, 32. “I remember a stage where I thought there was nothing in the shops that I wanted that I couldn’t have. I felt like I could afford anything. I loved my lifestyle. If I wanted it, I’d buy it.”

Dain’s situation is no longer quite so rosy. Her latest apartment — a 19th-century dwelling a minute's walk from a popular park — has now been on the market for a year. But only two potential buyers have viewed it in the past six months. With job security a concern, Dain has sought the advice of a financial adviser.

She admits she has been somewhat naive. “If I knew then what I knew now I would have saved a bit of money each month,” Dain said. “I just thought things would keep steadily moving up in the property market. I think a lot of people could’ve prepared for this that way but because they’ve never been through a recession they didn’t know any different.”

Foreclosures loom
Dain is OK for now, but the threat of foreclosure remains a very real concern for many Britons. The number of homes in the U.K. repossessed by lenders rose by 54 per cent to 40,000 during 2008 — the equivalent of one in 290 mortgages. The Council of Mortgage Lenders trade association expects that figure to reach 75,000 this year. (The Federal Reserve estimated that new foreclosures in the U.S. would hit 2.25 million last year, more than double the pre-crisis level.)

Who’s to blame? Britain’s media has targeted the well-paid bankers who engaged in risky financial strategies, with the government even vowing action to claw back former Royal Bank of Scotland chief Sir Fred Goodwin’s $1,000,000-a-year pension.

Sir Fred took early retirement at age 50 just a month before the bank reported the biggest loss in British corporate history . His Edinburgh mansion last week was targeted by vandals who hurled bricks through his windows and damaged his Mercedes.

But Adam Sampson, chief executive of housing charity Shelter, believes many homeowners must accept some of the blame for embracing a “buy a house, get wealthy” attitude.

Meanwhile, Nick Clegg, leader of the left-center Liberal Democrats, has accused Margaret Thatcher, the pro-business prime minister who served from 1979-1990, of sowing the seeds of the current crisis by preaching a brand of “cut-throat, sink-or-swim materialism” that led to inflated prices and rampant consumerism.

The effects of Thatcherism are certainly evident in London, where Nationwide’s figures say that the average cost of buying a home sat at 257,963 pounds ($370,000) in December. When Thatcher took power, inflation-adjusted stats show the typical U.K. home cost just 74,832 pounds.

And London’s reliance on the financial-services sector as a driver of wealth has seen it particularly badly hit by the economic downturn. At least 28,000 jobs in the City financial district vanished last year, and in January experts with the Center for Economic and Business Research predicted that another 147,000 jobs would be lost London-wide by the end of 2009.

The slump has brought a feeling of malaise across the capital.

Homeowner Melissa Chlad Millard says the uncertainty has had a profound psychological effect on day-to-day life — even in the “recession resistant” health-care industry she works in — with workplace competition between employees desperate to hang onto their jobs is becoming common.

“London has been a good environment for people looking for jobs and for property investment,” said the Australian-born 34-year-old, who bought an apartment in central London in 2006.  “I don’t think it occurred to me that it was a boom period. It was just normal.

“Employers were willing to do whatever they could to keep good people but that's turned on its head completely. It’s made people wary and secretive. There is a sense that you need look out for yourself.”

No recession experience
While her grandparents’ generation experienced the Great Depression and rationing during the Second World War, Chlad Millard believes her lifetime of almost non-stop prosperity has left the “lessons from the past a little too far away”.

“Our parents would save for a deposit on a home, save for [furniture], save for their holidays,” she said. “We’ve grown up in such a ‘now, now, now’ and ‘me, me, me’ society. We’ve got a mentality of ‘it’s easier to pay it off than it is to save for it.’ You could always buy something on credit. There’s always been a sense if that ‘if I want it I can get it now.’ ” 

Back in Edinburgh, Nicola Wilson (no relation to Jennifer Wilson) is determined to stay positive despite the credit crunch.

Image: Nicola Wilson
Courtesy of Nicola Wilson
The economic downturn prompted Nicola Wilson to cut her personal spending but she also believes the crisis will prompt many to rediscover their "real values."

“The recession has taught me that you don’t have to be extravagant to have a good time,” the stylish 29-year-old said. “I feel lucky for what I have.”

As a personal assistant to a jeweler, she admits that her job is “hanging by a thread” as luxury goods are suddenly no longer a priority for many Britons. Customer traffic at the upmarket shop has dropped 50 per cent year-on-year.

Fearing the worst, she’s scrapped the 50 pounds per month she’d spend at the beauty salon, has traded nights in the pub for gatherings in friends’ living rooms and is considering moving back in with her mother. The bleak financial situation that has provided a “reality check” also has her contemplating applying to university.

Citing the name of a famous Scottish soft drink, Nicola Wilson said she now realized that she’d been “living a Champagne lifestyle on an Irn-Bru wage” and recognizes the errors of her ways.

“Greed makes people lose sight of what’s important and what their real values are,” she added. “And loss makes people determined to regain.”

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