A year ago, there was widespread scepticism that the UK housing market could crash. Today, the market is going down in flames. In London, the city at the epicentre of housing madness, prices fell by 2.5 percent in just one month. However London is just playing catch-up. Regional housing markets have been slumping for almost a year. Mortgage rates are rising, and a few ill-advised interest-rate cuts will not restore the irrational optimism that characterised the UK during the last 10 years.
Today, Northern Rock, one of the UK's largest and most reckless mortgage lenders, is facing a liquidity crisis. Its share price has tumbled by a third in a single day, while customers are queueing outside branches, desperate to retrieve their funds. Northern Rock's lack of cash threatens to take down the mortgage lending industry with it. If Northern Rock can not pay off its liabilities, are there other cash constrained banks out there?
Blame for this calamity has been placed at the door of the sub prime crisis in America. Yet UK Banks have little or no exposure to the US housing market, and that includes Northern Rock. So what exactly did the UK housing market take from recent developments across the Atlantic?
The only thing that the UK housing market imported from the US was fear. This fear took hold in the UK because there is something to be afraid about. UK housing is massively overvalued, homeowners are deep in debt, and their capacity to repay that debt is in doubt. If the UK housing market was in good shape, the sub prime crash in the US would be a distant distraction, worthy of a few column inches in the Financial Times and nothing more.
Like their counterparts in the US, UK Banks have extended mortgages to customers who are likely to default in large numbers. Giving mortgages at ratios of five times income doesn't make sense anywhere, not here, and not in the US. This kind of lending policy is goldplated evidence of a housing bubble.
Where do we go from here? House prices will collapse, consumer expenditure will fall, and recession will follow.