In the U.K., the bell tolling for housing market has a familiar ring to it

13 02 2008

In the U.K., the bell tolling for housing market has a familiar ring to it

Posted by: in Housing

Filed under: International markets, Forecasts, Economic data, Housing

The ever-incisive FT columnist and economist Martin Wolf offers fairly harsh advice for those in the United Kingdom (and the United States) considering a house purchase, on the belief that home prices have bottomed and will recover soon: that recovery isn’t happening any time soon. Nor should it, he argues.

The U.K. Government, Wolf stated, should not try to protect banks to save the housing market. To do this would encourage innocent prospective buyers (new borrowers) to buy at what is probably the top of “a hugely stretched market.”

And the characteristics of the U.K.’s housing bubble versus the United States’ deflating housing balloon/bursting bubble? Tax laws differ by nation, of course, but there are strong indications the U.K.’s bubble might at least be equal to the U.S.’s: U.K. home prices have increased 150%, in real terms, since 1996. At the same time, the ratio of U.K. household liabilities to disposable income is 175% in 2008, compared to slightly more than 100% in the mid-1990s. Wolf’s conclusion: that’s an unsustainable growth in debt that’s coming to an end.
In short, a housing correction is at hand, necessary, and U.K. public officials should not try to prevent it, Wolf said. Nor is the correction likely to end soon. Comparable corrections are also occurring in the debt markets. Wolf does approve of monetary policy to provide liquidity, maintain orderly markets, and manage the economy through this correction, but the idea of a government policy to keep housing high-priced - - i.e. maintain a stretched market - - is insane.

Further, U.K. fiscal stimulus remains only a modest tool in the current fight against recession, due to the U.K.’s outsized public spending during the previous boom.

Economic Analysis: Wolf offers sobering statistics on the say of the U.K. housing market, and its immediate prospects. And while some U.S. investors/readers may argue for a replication of his tough stance in the U.S. regarding a potential housing market bailout, the U.S. market’s complexity and size talks against that. In other words, bailing-out investors who leveraged inadequate equity to build speculative condominium complexes in Las Vegas differs substantially from a policy that would prevent big owner-occupied home defaults from triggering a huge recession.