Bank warns of "collapsing house price nightmare" in UK

Another day, another dire warning about the state of the UK economy foreseeing the possibility of a "collapsing house price nightmare" ............................

Daily Telegraph. 13th May

Collapsing house price 'nightmare' a real risk, says bank By Ambrose Evans-Pritchard (Filed: 13/05/2005)

Bank of America warned yesterday that Britain could face a "nightmare scenario" as collapsing house prices combined with the pain of tighter fiscal policy.

The bank's top team of economists said Britain is "likely heading for a much rougher time in the third Labour term".

"A rising burden of taxes and regulations" has eroded the country's competitive advantage, they said.

"On the demand side, the debt financed spending spree of consumers is petering out while the almost unprecedented surge in government spending looks increasingly unsustainable," warned the client note.

The report said that the Bank of England would have to start cutting rates in the autumn as the slowdown became apparent. It forecast quarterly growth of 0.4pc through the second half of 2005, but stopped short of predicting a recession.

"Skyrocketing house prices" had enabled consumers to draw down "staggering" levels of mortgage equity for spending. But the "multiplying" effect of the boom was running out under the delayed impact of earlier rate rises.

The report said the public sector could no longer fill the breach after the sharp rise in spending between 2001 and 2004, when the state accounted for 45pc of all jobs created in Britain.

The spending had been "largely financed by a rising fiscal deficit", causing the government finances (adjusted for the cycle) to deteriorate from a 1.2pc surplus in 1999 to a 3.4pc deficit in 2004, leaving "hardly any leeway to offset a downturn in private demand".

"We cannot rule out a nightmare scenario in which a decline in consumption caused by a sudden correction in house prices would lead to an explosive rise in the fiscal deficit that would have to be addressed by a tighter fiscal policy," said the note.

Lorenzo Codogno, the co-author, said Britain now had one of "worst deficits" in the industrial world, given the late stage of the cycle. Germany and Italy had similar deficits, but in the context of an economic slump.

"If there was a recession, the British deficit could jump dramatically, easily exceeding 5pc," he said.

Bank of America said it still believed a "soft-landing" was likely for the housing market. It said British house prices had raced ahead of even US property in recent years, leaving little doubt that the country was in the grip of a speculative bubble.

In a warning shot, the report said Britain's ever more bur-dened economy could soon find itself being overtaken by the euro-zone.

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Reply to
crowleyalastair
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In message , snipped-for-privacy@yahoo.co.uk writes

Considering that the 'value' of one's property exists only in the received wisdom of the buyer I get the impression that someone desperately requires a downward revision in UK house 'prices'.

As a buyer I will certainly now revise my subsequent offers downward.

"Don't you realise there is a 'collapsing house price nightmare' approaching? How on earth do you expect to get 250 grand for this place?"

Has someone informed the 'Estate Agents' of this altering reality?

Reply to
Aramis Gunton

By at least 30 to 40 % or you will still be paying too much.

Some estate agents like Miles Shipside boss of Countrywide seem to be waking up and are starting to "encourage" sellers to drop prices. Hardly surprising when sales have dropped by over a third from a year ago and estate agents only get their commission through sales. The 5 to 15% reductions we are seeing at the moment though are just the start and IMO some sellers will be slashing prices by 30% or more by the winter. For the foreseeable future : CASH IS KING.

Reply to
crowleyalastair

I doubt it - very few people set foot in estate agents these days.

Reply to
curiosity

And the economic gloom continues.........perhaps its something to do with it being Friday the thirteenth ?

Fear and loathing in the UK

13th May 2005,

Confidence in the housing market has slumped alarmingly, while fears of unemployment have returned, according to propertyfinder.com's latest survey. More than one in five people now expects rising unemployment to trigger a property slump compared with just one in 20 in October last year, the property website said.

The survey showed 64% of respondents expect house prices to fall over the next 12 months, almost twice as many as the 37% who were expecting price falls in February.

Propertyfinder said these fears had been fuelled by the high-profile collapse of MG Rover and job losses at IBM.

Jim Buckle, the managing director of propertyfinder, said: "With consumer confidence already shaky and higher taxes likely to take another bite out of consumer incomes, growing job insecurity is the last straw.

"What's more, people are now expecting price falls of about 8%, compared with falls of just over 2% in March."

Buckle added that this nervousness was causing homebuyers to borrow less. He said that while a year ago average buyers were looking to buy homes that were worth 4.9 times their household income, today the multiple is just 4.2.

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Reply to
crowleyalastair

House prices are the highest they've ever been relative to incomes. What do you think usually happens when prices rise to historical highs? They go up?

Heck, I could barely afford a two-bedroom house around where I live with a 4xincome mortgage, and I could put down a six-figure deposit! Five years ago one of my neighbours bought their four-bedroom house for less than that: what has happened in the last five years to make their house 'worth' more than twice as much?

The most I'd offer right now is 25% below the EA-approved price. If the seller won't take that, they're not serious, and if you pay more you'll probably be in negative equity within a year.

The ones who still have jobs, you mean?

The only reason why prices haven't crashed already is because people aren't desperate enough to sell. I read a couple of emigration lists, where people _have_ to sell that huge brick-and-mortar millstone in order to get out of the country:

One person has had their house on the market for 18 months at the EA-approved price, and not one offer.

One sold recently after nine months, by cutting 15% off the EA-approved price.

One has sold their house _FOUR_ times now, but the sale never completes. You see, there are almost no first time buyers able to buy anything better than a garden shed, and if there's no FTB to buy the house at the bottom of the chain, you can't sell. Ah, the joy of insanely high house prices!

Those who have sold typically seem to have done so for 15-20% below the EA-approved price, after 6-12 months on the market with no interest. As more and more people actually decide they want to sell their house _now_ at a 20% reduction rather than in two years for a 50% reduction, prices will come crashing down.

And it's going to be real fun to watch the 'house prices always go up' brigade when that happens.

Mark

Reply to
mmaker

Also, remember to check on the web to find out how much _they_ paid for the house and when. If they bought it for 100k in 2002 and are trying to sell it to you for 300k now, ask them what exactly they've done in the last three years to add 200k to the value. Mmm, new tiles in the bathroom, and a new kitchen, yep, that's worth all that money!

And don't forget to gazunder later on as prices drop!

Mark

Reply to
mmaker

On 13 May 2005 02:05:06 -0700, snipped-for-privacy@yahoo.co.uk mysteriously appeared thru the usenet mist to inform us thus...

And the Blair/Brown so-called economic miracle will end in tears. It always does.

Reply to
hummingbird

Is it not likely that these pronouncements are all coming from parties who have vested interests in keeping interest rates low or lower?

(Exactly what the Bank of America think the UK housing market has to do with them, for example...)

Reply to
Zero Tolerance

In message , snipped-for-privacy@yahoo.co.uk writes

There's a f%$&^*(g surprise

This wasnt rocket science.

Reply to
Richard Faulkner

Why would the BoE cut rates to try to prevent a house price crash? There are far worse things that could happen to the economy as a result of a crash in the pound due to the BoE cutting rates.

Mark

Reply to
mmaker

Exactly. Cut sterling interest rates while dollar rates are on the way up ..... pound falls against the dollar ......oil prices (valued in dollars) go up........UK inflation increases. The UK economy is between a rock and a hard place. There is no easy way out this time.

Reply to
crowleyalastair

They're too busy laying off staff to pay attention.

FoFP

Reply to
M Holmes

After the early 90s crash, I can't believe anyone would think that prices must always go up. If there are too few first time buyers then that will assuredly kill the market.

Reply to
Harry the Horse

Well, first of all - answer the converse: Why *did* the BoE increase rates previously to try to prevent further house price increases??

Reply to
Tim

But the last time there was a house price crash it took the rest of the economy with it. So much of the economy depends on the merry-go-round of us swapping houses every few years.

You mean like the export industry being so much more competitive.

Reply to
Harry the Horse

On 13 May 2005 05:14:12 -0700, snipped-for-privacy@yahoo.co.uk mysteriously appeared thru the usenet mist to inform us thus...

Raise taxes. Increase the state payroll some more. Blair & Brown-Stuff are itching to.

Reply to
hummingbird

What makes you think they won't be invested in UK mortgage derivatives?

FoFP

Reply to
M Holmes

It usually ends in a currency crisis under Labour doesn't it?

FoFP

Reply to
M Holmes

To try to stop the deflation that would follow a house price crash.

There's the rub. A currency crisis, led say by some global derivatives accident, could lead to emergency rises in interest rates to protect the Pound. I've seen such analysis talking about base rates of 6% to 8% and mortgage rates a couple of percent above that.

I have little doubt that a sudden mortgage rate move to 10% would hurt a few people.

FoFP

Reply to
M Holmes

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