UK housing market 'could crash' harder than US
Monday 6th June 2011
House prices in Britain are still over-valued by one-third – and the UK property bubble puts that of the US ‘in the shade’.
The claims are made in an article in the Wall Street Journal and come as the US housing market continues its long crash. House prices in America are now one-third off their 2006 peak – a sharper fall than in the Great Depression.
The WSJ piece challenged an analyst who said less than a year ago that the UK housing market was a bubble which had survived the financial crisis intact.
Journalist Alen Mattich disputes this. He says that house prices in the UK are still 4.4 times average earnings, and at peak were 5.8 times average earnings. By contrast, US house prices were 4.8 times average earnings before they crashed. In both countries, he says house prices should be 3.4 times earnings.
He says: “Indeed, the UK property bubble was more akin to that seen in Japan in the late 1980s. This is a comparison to chill British homeowners’ blood, because Japanese property prices have slid for the best part of 20 years.
“So far, the Bank of England has managed to underpin the market. Its zero interest-rate policy and sterling’s 25% devaluation from its 2007 peak have helped stabilise prices. But this stability is now looking vulnerable.
“Indeed, the UK housing market seems to be set more in aspic than on firm foundations. The number of mortgage approvals by banks is running at a mere 40% of where they averaged during the five years leading to the market’s peak. The current rate of approvals is only two-thirds of what economists say is necessary to maintain stable prices.
“The BOE’s commitment notwithstanding, the aspic is wobbling.”
The article goes on to say that eventually, even the currently booming London property market “will start to reflect the reality of British economics”.
It warns: “The big risk is that UK real estate suffers a dramatic collapse. The second big risk is that it takes decades to return to normality, much as has happened in Japan.”
In the US, house prices are now back to 2002 levels, with prices in some regions below 2000 levels. An estimated 28.4% of US home owners are in negative equity.
Standard & Poor’s Case-Shiller home price index has fallen for eight months in a row and declined by 4.2% in the first quarter of 2011, following a 3.6% fall in the fourth quarter of 2010.
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