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.

http://online.wsj.com/

(3) Comments

Added by Terence PO'Halloran on 2011-06-13 13:35:28

I have to agree with this article. Over my 40 years in financial services I have identified the classic market as a 15 year cycle highlighted in my latest book 'Hindsight-The Foresight Saga' which clearly illustrates the 'dead cat bounce' that we are currently experiencing as a mild recovery in property price/value that will subside into a 10-15% further drop in the property market until inflation forces a 'valley' from which it will emerge in around 5 years time. People need to be aware, and avoid property for at least 12 to 18 months to obtain the best buying deals.
Added by Incogna on 2011-06-06 12:35:49

Smudger...

I'd love to agree with you, I really would, but call me a negative nancy if you want but the supply and demand thing didn't stop Japan's 20 year property nightmare. Theirs was the most expensive property in the world, now London's is. I hope you're right and I'm wrong though - I really, really really, REALLY do.
Added by Smudger on 2011-06-06 10:47:23

Oh my god, Supply & Demand, what are these people on. Your have more space in the US, you are over supplied!!!!!! We are under supplied by 100,000 house a year!!!!
I bet this gets some headlines as well, beyond belief.

Related News Stories

Most Read News Stories