House Price Crash___No Soft Landing

Bloombergs are getting bearish on house prices .............

U.K. House-Price `Soft Landing' May Be a Dream: Matthew Lynn June 22 (Bloomberg)

-- For the past year, the favorite metaphor of central bankers and economists who follow the U.K.'s fevered housing market has been the ``soft landing.''

It is a nice phrase, conjuring up an image of a plane coming gently onto the runway, before everyone happily disembarks.

Now it is replaced by grimmer aeronautical metaphors: storms, turbulence, and even crash.

The ``soft landing'' in the U.K. housing market has been canceled. A sharp decline is now more likely. And a housing slump may well lead the economy into its first recession this decade.

The Bank of England now faces a dilemma on interest rates. Having steered the real-estate market down with five rate increases from November 2003 through August 2004, it may soon be trying to pump it up again.

Other central banks are watching with interest. It looks like this experiment in taming house-price inflation is going awry.

``There is certainly some pressure building in the market,'' said Milan Khatri, chief economist at the U.K.'s Royal Institution of Chartered Surveyors in London, in a telephone interview. ``What we need to see now is whether that is just a response to the interest-rate rises of last year, or whether there is something else going on.''

The noises coming out of the housing market in the past few weeks have been increasingly worrying.

1992 Crash

Last week, the Royal Institution of Chartered Surveyors said the number of estate agents and surveyors who reported falling house prices exceeded those announcing increases by 49 percentage points for the quarter through May. That figure compared with 41 points in the three months through April. The result, based on 315 responses and adjusted for seasonal factors, was the weakest since November 1992.

Anyone familiar with the history of U.K. house prices will know that

1992 was the nadir of the last big property crash, when homes lost as much as a third of their value.

Other signals in the real-estate market point to prices cooling.

This week, property Web site Rightmove said June house-price inflation in England and Wales was just 0.2 percent, a five-month low. And HBOS Plc, Britain's biggest mortgage lender, has said house prices fell 0.6 percent in May, the most in seven months.

``It seems probable that we are still only in the early stages of a protracted housing market correction,'' said Ed Stansfield, an economist at Capital Economics Ltd. in London, in a report this month.

Unemployment

Only a robust economy can moderate a house-price decline and the U.K.'s isn't looking so healthy anymore.

Last week, the government said jobless claims rose for a fourth month in May, the longest stretch of increases in 12 years. The last time unemployment had that kind of sustained advance was in the trough of the last property crash.

The British Retail Consortium said June 7 that U.K. stores open at least a year had their worst May sales decline on record. Meanwhile, a widening government deficit will probably prompt tax increases and spending cuts. None of that suggests a turnaround in the economic outlook.

It isn't hard to sketch out the crash. Store sales slump, so people lose jobs. Their houses are repossessed when they can't meet the mortgage payments. That floods the market with properties -- at precisely the same time the buyers have disappeared.

Every market lives on momentum. It seldom stops where it should -- on the way up or down. As prices fall, confidence evaporates. The U.K. housing market seems set to repeat that well- established pattern.

20 Percent Increases

Nobody would question that the Bank of England was right to try to cool a fevered market. House-price increases of 20 percent or more a year were unsustainable. By raising the benchmark lending rate to the current 4.75 percent, it limited inflation.

Still, asset markets are hard to control precisely because they are so volatile. Once a trend is established, it takes on a life of its own.

For the U.K., a quarter-point cut in interest rates later this year may help stabilize the housing market. If it doesn't, something nasty will happen.

Soft landings in choppy weather are tough -- both for pilots and central bankers.

To contact the writer of this column: Matthew Lynn in London at snipped-for-privacy@bloomberg.net.

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