Friday, May 13, 2005

Bank Issues Warning On UK Housing Prices

Bank of America put together a report on the British economy that included a warning on housing. "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."

"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."


At 8:20 AM, Anonymous Anonymous said...

It now seems that the media has come to grips with the fact that it is a "bubble". But now the buzz word is "soft landing"... Could they go 0 for 2 on their predictions...

first there was no "bubble", now there is... but it will end with a "soft landing".

How often do "bubbles" end with a "soft landing"...

At 8:43 AM, Blogger Ben Jones said...

8:20 anon,
They always burst spectacularly. Usually dropping below where they started from.

That's the real question regarding housing. As these markets continue to inflate, the "soft landing" position gets weaker.

At 8:49 AM, Anonymous Anonymous said...

True bubbles never have a soft landing. There is always a hard correction followed by a stagnant period. I challange anyone to think of an example to the contrary. What's debatable is whether or not a bubble actually exists. I am of the opinion that we have a very serious housing bubble that only is getting worse.

One thing I wonder is: how much higher has the UK gone, and are we approaching the same level? If we keep appreciating like we are, eventually we'll get there. What I don't know is if it's a requirement for us to reach the same level of appreciation before a correction. Each bubble is different, but there are similarities.

At 8:59 AM, Anonymous Anonymous said...

Japan's real estate bubble has declined in a looooooong painful grind. I guess you could call it a hard correction in slow motion. Their stock market crashed dramatically but the banks have kept bad loans on the books all these years.

At 9:10 AM, Anonymous Anonymous said...

So I guess a better statement would be:

A bubble is always followed by a painful correction, although it can be a prolonged correction depending upon market manipulation.

To be honest, I doubt that our correction will be anything like Japan's. Ours will be a lot more dramatic (but also much shorter.) I share Fleckentein's view on this.

At 9:14 AM, Anonymous powerpuffgirl said...

"Japan's real estate bubble has declined in a looooooong painful grind"

This isn't what is meant by "soft-landing". The RE hopefuls honestly believe that we can go from a period of mega-appreciation to a period of slow GROWTH. This would be unprecendented, and they are truly dreaming.

At 10:16 AM, Blogger deb said...

Our coastal RE rivals what has happened in the UK easily. Yes, we have some inland areas that have appreciated more modestly, but that just keeps our national stats from looking as horrific as they are. The coastal sellers and speculators are moving inland and driving those prices up now. I think the coasts have just about maxed out.

At 10:39 AM, Anonymous alex norman said...

As noted on this blog, median home prices have gone up 44% in the last year in Hawaii.

Again, the metaphor of a spreading plague is appropriate: boomers cashing out from major coastal metro areas, then driving up prices buying second homes/retirement homes elsewhere.

We've seen evidence of sharp drop-offs in price in Australia and UK. The real proof will be the impact on the economy as a whole. Will the housing burst lead to a prolonged recession/depression?

GDP in america is 71% consumption fueled by houses as ATMs (not wage growth) and 5% housing complex (building, selling, financing real estate). If, as one economist has noted, we are now in a "housing-based economy", then our recession could be sharper and worse than Japan's.

Look to the UK...

At 12:56 PM, Anonymous Anonymous said...

This is great reading, and lots of food for thought. My husband and I are in the Metro Boston Area, specifically the South Shore. We are very curious about the "bubble" as we are current renters about to buy in this crazy market. Does anyone have any data points on the Boston market?


At 1:26 PM, Anonymous tony blair's conscience said...

The UK has had a bubble that, in all honesty, dwarfs most of what we've seen in the US---except in some of our most bubbly markets.

So, IMO, they will have a savage bust. Over here, my guess is that some markets will flatten, others will fall harder (Fla, Calif, NV, AZ, etc). But the UK is a disaster waiting to happen.

There is next to no population growth in the UK. And no one is buying a 2nd home or vacation home in the UK from outside the country. So it's all about EZ credit and false optimism. The fundamentals are putrid.

At 1:26 PM, Anonymous Anonymous said...

Hey anon 1256,

I rent in Boston also - Somerville to be exact.

Seems like there are some crazy condos here listing for $450K!

Geez, it's Slummerville, people.

Seriously, seems like renting is almost half the cost of buying a condo.

At 3:24 PM, Anonymous Anonymous said...

South Coast of Mass (New Bedford, etc.) was the worst hit regions in the early 1990s. An astounding 50%. The area is relatively poor, so there is nothing that will inherently support it when things turn sour. When a mortgage company PMI (normally cheerleaders) says that Boston faces 50% risk and you are probably in one of the riskiest regions then I would rank your risk factor at about 95%.

The UK bubble has already inflated in parts of London market. As far back as 18 months ago my friend took delivery of a new condo that had already lost 20% (or about $200,000) of its value compared to the construction the price. New construction with future delivery is of course one of the riskiest investments in a bubble.

Statistically things looked ok in the UK because prices for "low cost" housing (around $400k) continued to apprecitate in the Southeast and the bubble spread to places in the north and other regions that you would not expect it.

If we cut out the low density regions of the US then the bubble is similar but a time lag of about 2 years.

At 3:27 PM, Anonymous Anonymous said...

Ok, you said South Shore (like Hingham, Plymouth, etc. ?) Do your own research. Pull up historical records...... Check out numbers from the last bubble.

Read the CSW study on the last study.

If you are going from renting to buying in this market then you are making a HUGE mistake.

At 3:53 PM, Anonymous Anonymous said...

Boston will likely see a huge drop. Salaries here are quite low as compared to the West coast and New York.

Condos will drop by at least 50% to get in line with rents.
Many 2bd condos here a listing for $400K, yet they rent for $1300. It makes no sense.

Single family homes will drop 30%.
So that mean those houses listed for $500K will drop to $350K.

At 4:03 PM, Anonymous Anonymous said...

Many people lost tens of K during the tech bubble. Now, I wonder if many people will lost hundreds of thousand during the coming housing crash??

Can you imagine losing $100-200K on a home purchase? There goes that down payment.

At 7:06 PM, Anonymous Anonymous said...

tony blair's conscience said...

There is next to no population growth in the UK. And no one is buying a 2nd home or vacation home in the UK from outside the country. So it's all about EZ credit and false optimism. The fundamentals are putrid.

UK is experiencing moderate population growth due to a large influx of immigrants attracted by its booming economy over the last few years.

But more importantly, UK is experiencing significant growth in the number of households due to social trends like incresing numbers of people living alone, more single parents and divorcees etc.

The supply in the UK is much more constrained than in the US because UK zoning laws are much more restrictive.

Many foreigners own homes in London (espcially Arabs and nouveau riche from Eastern Europe) so there is significant foreign demand for UK property.

Monetary policy in the UK has never been as loose as in the US (UK base rates bottomed out at 3.5% which is 250 basis points and 3.5 times higher than the record low base rates in the US).

The UK has had 13 years of uninterrupted growth and inflation, interest rates and unemployment are all near 30 year lows. The UK currency recently hit a 10-year high against the US dollar although it has fallen back slightly since.

UK fundamentals are, if anything, less putrid than the US.

At 12:08 AM, Anonymous Anonymous said...

Tell that to my buddy who already lost his 20% cash downpayment (GBP 100k or nearly $200k) on a 2003 purchase....


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