Cameron’s Cuts Widening North-South U.K. Wealth Rift: Mortgages

Underwater mortgages and missed home-loan payments were almost unheard of when Joe Michna started listening to the troubles of residents in the northern English town of Hartlepool. Now, 26 years later, one in seven coming to him for help are worried about losing their home.

“When I first began as a volunteer, mortgage and rent arrears were comparatively rare,” said Michna, the 59-year-old manager of the Hartlepool Citizens Advice Bureau in a May 3 interview. “Now, it’s quite the opposite.”

The average price of a home in the industrial port town fell 9.4 percent to 115,809 pounds ($186,000) in the 12 months through February, according to research company Acadametrics Ltd. In London, 225 miles (362 kilometers) south of Hartlepool, the average price is 396,094 pounds after rising 1.2 percent.

Prime Minister David Cameron’s effort to slash Britain’s record budget deficit is widening a housing and wealth gap between the north of the country and the London area. The U.K. capital was the only one of 12 U.K. regions tracked where home values rose in April, the Royal Institution of Chartered Surveyors said in a May 8 home-price index that fell to a six-month low.

Cameron’s coalition of Conservatives and Liberal Democrats are trying to remedy a budget shortfall by 2017 with 155 billion pounds of tax increases and spending cuts to stave off the type of fiscal crisis engulfing countries such as Spain and Greece. The economy shrank in the first quarter as construction output slumped, pushing Britain into its first double-dip recession since the 1970s.

Photographer: Matthew Lloyd/Bloomberg

Northern parts of the U.K. accounted for about 60 percent of the rise in total mortgage arrears from the second quarter of 2010 to the end of 2011, S&P said its report. Close

Northern parts of the U.K. accounted for about 60 percent of the rise in total mortgage... Read More

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Photographer: Matthew Lloyd/Bloomberg

Northern parts of the U.K. accounted for about 60 percent of the rise in total mortgage arrears from the second quarter of 2010 to the end of 2011, S&P said its report.

Economic Impact

“You cannot separate the wider economic picture from the housing market,” said Iain Wright, Hartlepool’s Labour party representative in Parliament and a member of the Housing Ministry until former Prime Minister Gordon Brown lost the 2010 election.

The number of government workers will fall by 730,000 in the six years through March 2017, according to the Office for Budget Responsibility, a government-funded economic research company. More than 70 percent of those cuts will be outside of London, according to the Centre for Cities, a non-partisan research group.

Chancellor of the Exchequer George Osborne may need to slow the pace of his deficit squeeze to accommodate the weakness of Britain’s economy, two former Bank of England officials said yesterday. Ed Miliband, the leader of the Labour Party, is gaining ground on Cameron in British opinion polls after weeks of setbacks took their toll on the coalition government.

Shipbuilding Centers

The northeast of England, encompassing former coal mining and shipbuilding centers such as Newcastle upon Tyne and Sunderland, is the region most dependent on public-sector employment. Four of the seven council areas with the biggest proportion of employment in public administration, health and education are in the northeast.

Government job cuts and a slump in manufacturing and construction are driving a decline in home values in the north, Standard & Poor’s said in a report last month. More than half of the increase in arrears in the 18 months ending in 2011 was in the north, the ratings company said.

“Unemployment is rising again and interest rates on mortgages are potentially rising too,” Andrew South of S&P’s structured-finance division, who co-authored the report, said by phone. “Arrears seem to be driven by a diverging labor market” and “we expect it to continue diverging.”

S&P defined the “North” as the East Midlands, West Midlands, Northeast, Northwest, Yorkshire and Humber in England, as well as Wales and Scotland, delineating a divide that’s defined as much by geography as culture.

‘Billy Elliott’

While London is the financial and political capital, areas including Manchester, Liverpool and Leeds were industrial centers that saw declines after the end of World War II. Political divisions grew as unemployment increased and labor industrial relations worsened including a yearlong coal miners’ strike that began in 1984. That strike was the backdrop of the musical and movie “Billy Elliott.”

The fallout marked the premiership of Conservative Party Prime Minister Margaret Thatcher, whose policies of selling state assets and reducing union power hit hardest in the north of England and Scotland.

Tony Blair, who took over as prime minister from Conservative John Major in 1997, and his successor tried to revive northern areas hurt by the decline of mining and other manufacturing industries. For every job that was created in the U.K.’s north and the Midlands, 10 private-sector jobs were created in London and southern regions between 1998 and 2008, Paul Swinney, an economist at the Centre For Cities, said by phone.

Northern Rock Nationalized

Three months after Brown replaced Blair as prime minister in 2007, Newcastle-based lender Northern Rock Plc sought emergency funding from the Bank of England, becoming the first U.K. victim of the subprime mortgage crisis. Days later, customers lined up at branches to withdraw savings in the first run on a British bank in more than a century. Chancellor of the Exchequer Alistair Darling nationalized the lender in February 2008.

More people are seeking employment in London and are competing for fewer jobs and fewer homes, said Swinney. That’s pushing up home prices in the southeast and those constraints are less prominent elsewhere in the country.

“The probability of finding employment in London is so much greater,” said Swinney, who grew up in Sunderland.

‘Closer to Europe’

“Once upon a time it was about being near ports and rail networks,” Swinney said. “Now it’s about being close to motorways and being closer to Europe, so you see a shift from the industrial towns in the north to the smaller places around London.”

Northern parts of the U.K. accounted for about 60 percent of the rise in total mortgage arrears from the second quarter of 2010 to the end of 2011, S&P said its report. About 8.5 percent of mortgage borrowers in northern regions were in negative equity, where the loan amount exceeds the property value, in the fourth quarter 2011, compared with 3.3 percent in southern areas, the ratings company said. Borrowers in the north were 30 percent more likely to be behind in mortgage payments than homeowners in the south, S&P said.

Northern Rock

Northern Rock mortgages secured on homes in northern regions are also being repaid at a slower pace than other parts of the country. The collateral backing its Granite Master Issuer Plc´s mortgages declined 64 percent since May 2007 to 19.4 billion pounds, compared with a reduction of 60 percent on the outstanding mortgages in the Northwest, Northeast and Northern Ireland, and an 83 percent reduction of home loans in Greater London, according to data compiled by Bloomberg.

With unemployment rising and home values falling, lenders are less willing to provide new credit or refinance existing loans. Last year, 141 billion pounds of mortgages were originated compared in the U.K. with 363 billion pounds in 2007, according to the Council of Mortgage Lenders.

That’s had more of an impact on areas outside of London, according to Dipesh Mehta, a securitization analyst at Barclays Capital.

“The London housing market has performed better over the last year than the rest of the U.K. and hence provides a safer option for risk averse lenders,” said Mehta.

“Mortgage lenders are starting to turn the screws on some of my residents,” said Jenny Chapman, a Labour lawmaker representing Darlington, a town near Hartlepool, where home prices fell 12.9 percent in a year, the most in England and Wales, according to Acadametrics. “The future is quite scary for them. They’ve had all the leniency that they’re going to get.”

Time Bombs

Tighter credit is giving rise to so-called mortgage time bombs, a legacy of the easy credit of the boom years, according to the Financial Services Authority. Two of every five U.K. mortgages are interest-only, where borrowers pay no principal on the actual loan, according to FSA data. About 78 percent of the borrowers had no repayment strategy in the third quarter of 2011, with many relying on home values rising to help pay the principle or refinance, the FSA said.

FSA Director Martin Wheatley warned in March of a “ticking time bomb” of interest-only mortgages. The regulator estimates that 1.5 million such mortgages, valued at 120 billion pounds, are due for repayment between 2011 and 2020.

Hartlepool’s Wright said he’s spoken with residents who are struggling to pay their mortgage as lenders increase interest rates.

‘Big House’

“They bought quite a big house at the height of the boom on an interest-only mortgage,” Wright said. “They can’t afford to pay their mortgage.”

The main street is peppered with vacant stores, theme bars and fast-food spots. Unemployment in Hartlepool rose to 14.2 percent in the year through September 2011, the most recent data and highest rate since the Office for National Statistics began collecting information in 2004.

Hartlepool “is a little rough around the edges,” said Susan Grecian, who owns the Skin Deep beauty parlor near the center of town and lives in nearby Sunderland. “I wouldn’t buy a home here because the prices have fallen very far.”

Around the corner from Skin Deep and a half-block from Tasty Bites II, where southern fried chicken and pizza are served until 3:00 a.m., is Michna’s red-brick advice office.

Missed rent and mortgage payments account for about 15 percent of inquiries lately and that’s likely to rise, said Michna, who lives a 25-minute drive away in Middlesbrough. “It’s very worrying,” he said.

To contact the reporter on this story: Christopher Spillane in London at cspillane3@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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