Monday, November 29, 2004

According to the British mortgage broker Nationwide, a 10% price decline in one year constitutes a "housing crash". And the likelihood of a crash in 2005 is rising dramatically.
Nationwide, the UK's largest building society, will warn this week that there is a 20 to 30 per cent chance of a house price crash happening next year.

The forecast for 2005, published on Tuesday, will add to the growing fears of a "hard landing" for the housing market.

The society's chief economist, Alex Bannister, said he still believed that "slight increases" in prices were the most likely scenario next year, giving this a probability of 60 per cent.

But the chance of prices falling by, on average, between 10 and 20 per cent in 2005 was now almost one in three, he said. The chance of prices growing more strongly, in line with recent rises, was one in 10.

"The market is highly valued at the moment," he said. "Our view is that people won't panic. But anyone telling you that [a crash] is not going to happen is talking rubbish."
According to HBOS, seasonally-adjusted prices across the UK changed -0.5% in August and -1.1% in October. Another firm, Rightmove, is reporting -1.7% so far in November.

And already 2004 is showing a much steeper slide than in 1989 when the previous UK housing bubble began deflating. When seasonally-adjusted prices peaked in May 1989, they were -0.7% two months later; if Rightmove's data proves correct, nationwide prices peaked most recently in September 2004 and will be -2.8% from peak in November.

Moreover, one has to suspect that the price decline in London is more severe than in the country as a whole. Prices nationally were +2.7% in 2004:III whereas in Greater London they were -0.6%. Median home prices might not fall 10% across the country, but in London the chances could be 50-50.

Some in Britain are already looking ahead to dramatic falls in interest rates from the Bank of England to counter-act the popping bubble.
The housing downturn has changed perceptions about the interest-rate outlook.

One of the most aggressive interest-rate forecasts is from John O�Sullivan at Dresdner Kleinwort Wasserstein. He expects the Bank of England to cut the base rate to 4% by the end of next year in an efforts to limit the house-price drop to 5%.

My view is that the Bank�s monetary policy committee, having worked hard to get rates up from last year�s emergency low level of 3.5% to the present 4.75%, won�t surrender cuts without a fight and would like to keep rates where they are for quite a long time. But these things can change rapidly.

The shift in rate expectations, particularly among City economists, has been dramatic, and it is reflected in the currency markets. The pound has been climbing against the dollar but slipping against the euro. Its rise against the sickly dollar would have been much bigger had it not coincided with the softening of the outlook for rates.
The BoE loaded its basis point gun over the last eighteen months by 1.25% and is now at 4.75%, giving it a lot of room to move lower. The US Fed is up 100 basis points, but only to 2.0%. Time to get a few more interest rate increases under the belt before the bubbles start popping a bit closer to home?

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