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.”
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.