Thursday, October 28, 2004

To crash or not to crash? That is the question.
despite growing evidence of a slowdown in the market, the Nationwide ruled out any possibility of a market crash.

While the group did not rule out falls in "isolated months", it did not expect a sustained period of declines as the economy is growing quickly and the jobs market remains strong.

"Developments remain consistent with our view that over the coming years, house prices are more likely to grow at a very subdued rate rather than fall sharply," said Nationwide group economist Alex Bannister.

"Our view is the current moderation in price growth expectations will not translate into widespread panic and that instead the market will experience subdued levels of turnover and price growth." . . .

Some analysts said the Nationwide could be mistaken in asserting that the market is in for a soft landing rather than a crash.

Given Wednesday's government figures showing an increase in house repossessions, the signs suggest that current price levels are unsustainable, experts warned.

"We believe that prices need to fall by around 20% to put the market back on a more sustainable footing," said Ed Stansfield, a property specialist at Capital Economics.

"Thus we expect price falls, such as that reported by the Nationwide today, will be the dominant trend of the next two to three years."
The "no crash" set feels that interest rates will not go over 5% in the UK and so no crash can occur. Of course, this fails to take into consideration all those homebuyers who bought using ARMs, and thus will not feel the interest rate hikes immediately. Much depends on real wages as well. If these fall, even steady mortgage payments will grow in relation to the rest of the family budget. This is especially true in London and the Southeast where the housing price-to-income ratio is already quite high.

The fate of the London housing market seems to be the best possible future scenario for the bubbly US markets in California, Florida and the Northeast. With US interest rates having much further increases to come, real wage growth and job growth less robust, and much more desperately leveraged homeowners than even in the most expensive boroughs of London, the US story could easily look a lot worse, too.


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