Housing Review

My out-of-consensus speculation that the Bank of England’s round of interest rate rises may be pretty much done looks sounder by the day. There may be one more rate increase, but it wouldn’t surprise me at all if they were pretty much over with it, and even if the next move (the end of this year?) wasn’t downwards. The reason? Growing evidence that the UK housing boom is bottoming out, and with this, UK consumption starting to take a hit.

U.K. mortgage lending growth probably slowed in August and consumer confidence may have weakened in September, suggesting economic growth peaked in the second quarter amid rising interest rates, surveys of economists showed……

House prices fell 0.6 percent in August from July, the first drop since August 2002, according to Edinburgh-based HBOS Plc, the U.K.’s largest mortgage lender. It was the biggest decline since December 2000.

Bank of England Governor Mervyn King and his rate-setting committee said they may have underestimated the effect of any decline in home values on consumer spending, according to minutes of the Bank of England’s Sept. 8-9 meeting.

“We’ve just come through a very slow holiday period and there is a general agreement that September is no improvement,” said Richard Hair, president of the National Association of Estate Agents. “We’re getting geared up for what may be a difficult market in the autumn.”
Source: Bloomberg


Of course I am far from being the only one to express concern about this problem.The latest edition of the IMF World Economic Outlook, which is available for download has a full chapter dedicated to the housing issue (another focuses on demographic changes and their macro-economic consequences: more on this in another post).

As the Financial Times has also indicated the housing boom in a number of countries has taken prices to levels that cannot be justified by economic fundamentals and any substantial market correction now inevitably poses a significant risk to global economic growth.

The Economist has been busily maintaining a global house-price index, which shows, among other things, that “never before have real house prices been rising so fast in so many countries” at the same time. This suggests that the process is in some measure inter-connected.

The IMF singles out four countries – the UK, Australia, Ireland and Spain – as in particular danger. They argue that increases of more than 50 per cent in a number of countries since 1997 can not be explained by ‘fundamentals’, for example low interest rates.

In the most affected countries the IMF argues that ?there is a danger that higher interest rates could trigger a much larger downward adjustment in house prices, with considerably more severe consequences for real economic activity?, and that given the increasingly close movements of house prices across countries this might mean that any market slowdown posed a significant risk to global growth.

The Economist itself provides one example of the impact of a ‘less than worse case scenario’, where prices simply level off, and don’t correct downwards: the Netherlands.

Even a mere levelling-off of house prices could trigger a sharp slowdown in consumer spending, as the recent experience of the Netherlands shows. The rate of Dutch house-price inflation slowed from 20% in 2000 to virtually zero by 2003. This appeared to be the perfect soft landing; prices did not fall. Yet consumer spending dropped by 1.2% last year, the biggest fall in any developed country in the past decade, pushing the economy into recession.

Although house prices did not fall, borrowing against the capital gains on homes to finance other spending, which had surged in step with rising prices, declined after 2001. This removed a powerful stimulus to spending. Since such borrowing has provided similar support to consumer spending in America, as well as in Britain and Australia, economists?and policymakers?would be wise to take heed.

This entry was posted in A Fistful Of Euros, Economics and demography and tagged , , , , , , , , , , , by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

11 thoughts on “Housing Review

  1. You probably shouldn’t read too much into one month’s data, but the Halifax’s (or is it that Nationwide’s) September survey is out Thursday.

  2. You probably shouldn’t read too much into one month’s data, but the Halifax’s (or is it that Nationwide’s) September survey is out Thursday.

  3. You probably shouldn’t read too much into one month’s data, but the Halifax’s (or is it that Nationwide’s) September survey is out Thursday.

  4. Interestingly, the general price increase in American housing seems moderate when compared with other developed countries. If there is a housing price break in America, we would have to expect the same in country after country. Prices recently have fallen in Japan and Hong Kong where prices were astonishingly high a decade ago. There was a fall and recovery and rise of prices in Britain, but we do not see an indication prices will fall generally. Possibly a bigger problem than the level of prices is the lack of affordability. We might easily have a flattening of housing prices for several years, while incomes rsie enough to extend affordability.

  5. Dutch economy had not only to deal with a stable houseprice but also a big increase in taxes and decrease in subsidies.

  6. “Dutch economy had not only to deal with a stable houseprice but also a big increase in taxes and decrease in subsidies.”

    Ok, thanks for this. This would be another dimension of the situation, the inevitable fiscal tightening to bring the deficit under control I imagine.

    “You probably shouldn’t read too much into one month’s data, but the Halifax’s (or is it that Nationwide’s) September survey is out Thursday.”

    I agree. But I’ve been watching this since the early summer and while there is some variability in the data being collected there does seem to be a slowdown on the way. My guess is that the interest tightening is working.

  7. “the Halifax’s (or is it that Nationwide’s) September survey is out Thursday.”

    It’s now out:

    “U.K. house price growth slowed on an annual basis for a second month in September as higher borrowing costs curb consumer confidence, Nationwide Building Society said….

    “House prices gained 3.1 percent in the third quarter, compared with a 5.3 percent increase in the second, Nationwide said. The lender predicts monthly price growth will accelerate to a seasonally adjusted average of 0.8 percent for the final three months of the year to meet its forecast of a 15 percent increase in prices in 2004″

    Bang on target I would say. But anyway one to watch going forward.

  8. Edward, do you think a levelling-off like in the Netherlands, or a housing price crash like in Japan is more likely for Britain?

    The housing boom was one of the worrying signs that Britain is moving towards a credit-based consumption driven economy. Could a levelling-off stop that, or only the inevitable crash sometime in the future?

  9. If we are here, this may seem off-topic, but do you have numbers on the level of investments (into production, not assets) in Britain? (I have a theory)

  10. “do you think a levelling-off like in the Netherlands, or a housing price crash like in Japan is more likely for Britain?”

    Ooooooh. Difficult one to call this. Obviously it would be comforting to believe the former, but the latter is also a possibility. One problem could be (1992 style) if the backdraft also produced a run on sterling, then it might be very difficult for the BoE to bring interest rates down low enough to compensate. Very tricky. We’ll really only know when it happens.

    I don’t have the data you asked for I’m afraid.

  11. It is still cheaper to buy than to rent. And there is a very large monopolistic party that constrains the production of new houses and controles the rent prices. Without those two factors the Dutch housingmarket would have crashed