Paper Economy: UK’s Boom Goin’ Bust!

Thursday, January 11, 2007

UK’s Boom Goin’ Bust!

One of the more interesting facets of our housing boom is that it isn’t ours alone.

Simultaneous housing booms have been occurring all around the world (except Germany and Japan) and in particular the UK and Australia.

As John Talbott astutely noted in his book “Sell Now!” these concurrent booms offer some pretty compelling evidence that our home price inflation is not substantiated by the many local factors (Boomer demographics, building restrictions, immigration, etc.) some would have you believe.

Instead, it points to factors that have been experienced across all of these countries, namely low interest rates, loose banking and LOTS of liquidity.

Throw a dash of human nature into the crucible and BLAMO! Enter the mania!

This evidence should really serve as a wakeup call to anyone who has deluded themselves into believing that the many myths the National Association of Realtors has manufactured during the boom years are credible.

The key here is that local factors have certainly made some contribution but exactly what is not very well understood. See “A Second Look at Second Homes” for more details.

Today though, in a move that is sure to raise concerns about the stability of housing in the UK, the Bank of England (BOE) unexpectedly raised their benchmark rate 25 basis points; the rate now stands inline with eh US at 5.25%.

Apparently, this rate hike was so unexpected that not a single economist of the fifty two surveyed by Bloomberg predicted it would occur.

``We are already seeing a rapidly growing number of people falling behind with mortgage payments and in some cases threatened with repossession,'' Peter Tutton, policy officer at Citizens Advice, a consumer debt counseling service.

The decision ``will result in stagnation and prevent existing homeowners from moving up the ladder,'' said Philip Davies, chief executive of house-builder Linden Homes. ``Consumer confidence will be dented by this latest rise, implying the continuation of an upward trend in interest rates into 2007.''

So, it seems just as our housing markets inflated simultaneously, so too do our central bankers now struggle to gain control over our overheated economies, while walking a “fine line” between “soft landing” and financial disaster made infinitely more complex by unsustainable home prices and crushing personal debt