Monday, August 16, 2004

The summit always looks like a plateau until you stare down the other side.
House price inflation froze last month, according to a report published today that provides fresh evidence that the Bank of England has succeeded in applying the brakes to the housing market.

The Royal Institution of Chartered Surveyors (Rics) said house prices stabilised in July for the first time in a year as buyers and sellers expressed an "air of caution", bringing the curtain down on nine months of runaway growth. . . .

The survey adds to the gloom enveloping the housing market. Last week a report by the property website Hometrack warned that house prices had reached a "plateau", and Countrywide, the estate agency group, said its house sales in July were 25 per cent down on the same month last year. Recent data has also showed mortgage approvals have slowed.
Two differences between the UK and the US suggest that perhaps this hiccup in housing prices may indeed be simply a breather in a largely sustainable upward trend. The first is the more robust real income growth in the UK than in the US.

The second are the much higher interest rates in the UK than in the US. Rates are already at 4.75% in Britain and in the view of many at their near-term peak. Thus high(er) mortgage prices are already built into the UK market, there is little chance that rate rises in the near future -- especially among all the holders of variable rate mortgages -- might send millions into foreclosure. With US rates at a mere 1.5%, there is quite a ways to go to reach 'neutrality' if indeed the Fed ever gets there.

According to Hometrack, the UK's leading property analyst,
Pack up your shovels and your prospecting pans: the Great Property Gold Rush (1994-2004) is officially at an end. . . . However, while double-digit inflation is coming to an end, don't expect estate agents to start wearing black armbands just yet. A crash, Wriglesworth argues, is unlikely: "We see no prospect of a sharper crash in prices.

"Interest rates are still low by historic standards and there are no signs that households are finding it difficult to service their debt repayments. Employment and household income are also growing.
Too bad one can't say the same thing for US homeowners.

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