Monday, May 24, 2004

Housing Watch: United Kingdom

You may wonder why I'm bothering to watch Housing prices in the UK (Guardian) given that they're a completely different market than the US. Well the reason why is that they're also having steep price rises, but since they're a different market I'm watching them for signals as to trends that might appear insofar as it being an asset bubble that I could then apply to the US market. There is no reason to conclude that exactly the same thing that happens there should happen here, but nonetheless I'm testing out my ideas about asset bubble pricing against more than one system in order to sharpen them.

It was third world export-led economic growth and housing prices in the Asian tiger economies that led me to conclude that agricultural subsidies were creating a property price bubble that would when it melted down would also take down the currency valuations. A few years later the world came to know it as the Asian Financial Crisis that happened after Greenspan strengthened the dollar with a series of sharp interest rate increases.

The Council of Mortgage Lenders will today nearly double its forecast for house price growth in 2004 to 14% following unexpectedly robust rises in the first part of the year. It is sticking to its forecast that prices will moderate next year, showing only single-digit growth as affordability limits are reached.

The CML dismissed weekend reports that it is calling for mortgage rates to double to prevent a house price crash. It said it anticipated that rates would rise, but only to 5.25% by the end of the year, compared with the current base rate of 4.5%.

CML spokeswoman Sue Anderson said: "We are not calling for rates to double, we don't want them to double and there is no need for them to double.

"In some ways it doesn't matter if house price inflation is double-digit at the moment, as it is not what informs the monetary policy committee when they are taking their decisions on rates."

The CML's figure of 5.25% is in line with market expectations. "We still believe that consumers will be reined back, even with moderate increases in interest rates, simply because affordability constraints will be reached," said Ms Anderson.

Speculation that the Bank of England could be tempted to raise interest rates again as soon as next month has been fuelled by figures which show Britain went on a house-buying spree in April.

Mortgage lending increased by a record £6.4bn in April to hit £25bn, according to the British Bankers' Association.

Loans for house purchase (excluding remortages) were 11% higher than in March and 58% higher than in April last year, suggesting that rate rises in November and February failed to ease price pressures.[emphasis added]

That brings up a central question? Does debt and overall price levels constrain buying and therefore continued bidding increasing price rises? The tulip crises of Holland indicates that yes, at some point the price rises to such a high level that there is some sort of crises in confidence about the sell-back value. However in my next post featuring an article by the CSM I would argue that this isn't an effective constraint to a bubble-crash scenario because the crises in confidence is the crash of the price bubble!

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