Thursday, September 23, 2004

For those of you following the UK housing market, you know that prices finally began to fall in August after years and years of blistering inflation.

If you live in California or Florida, or even parts of the Northeast, you know all about the first part. You may also become all too familiar with the second part as well.

The 125 basis point rise in British interest rates over just ten months -- from 3.50% in October 2003 to 4.75% in August 2004 -- has done its work, dramatically cooling off the bubbling UK housing market as intended. The IMF has been warning us about the feverish housing markets in the UK, US, Australia and several other countries for a year-and-a-half now, and in the latest issue of World Economic Outlook, the Fund tackles the issue again.

According to the Fund, "house prices are . . . synchronized across industrial countries," and that's why what happens in the UK or Australia is important both for the global economy and for the US, the giant commodity-and-capital vacuum for the planet. Britain is particularly important since it is such a large economy (seventh in the world, second in Europe) and has seen the second largest rise in housing prices in the world (after Ireland) over 1997-2003.

British housing stocks are being hit hard now that everyone recognizes the Big Slowdown in the UK housing market is here -- and the Big Drop-off may be none too far away.
Housebuilders were hit after two of the country�s largest property sellers warned of a softening UK housing market. Countrywide lost as much as 15 per cent after its second warning on the cooling UK housing market in five weeks. It said that full-year results would be below expectations, as the number of transactions and business volumes slowed compared to a strong August 2003. At the same time, Countryside Properties also said demand had slowed, particularly for lower priced homes in the South-East and London.
In the Fund's words, "the growth rate of real house prices in the United Kingdom is forecast to slow down significantly, and a fall in real house prices cannot be ruled out." It is more sanguine on the future of the US housing market, but this is based on national computations which are mostly meaningless for the heterogenous and segmented US housing market. While things may be fine in St. Louis and Minneapolis, they might not look fine at all in San Diego and Miami. Notably, the Fund throws in this caveat:
In cases where house prices may have exceeded fundamentals -- which may include Australia, Ireland, Spain and the United Kingdom [ed. -- and should include the most frothy markets in the US] . . . there is a danger that higher interest rates could trigger a much larger downward adjustment in house prices, with considerably more severe consequences for real activity.


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