Wave goodbye to the housing bubble and say hello to the crash. The great correction has begun. In six out of ten regions in England and Wales, house prices have stagnated. House prices are rising at a slower rate than CPI inflation, which is currently 3.1 percent. House prices are also rising more slowly than wages. As a investment, housing in most of the UK is offering negative returns. Investors would be better off sticking their money into a deposit account at the building society. The only hold-out regions are London and the south, where the bubble is powering ahead, at least for the moment.
Many parts of the UK have reached the tipping point. The UK will now experience a chain reaction, which will start once prices stagnate. The delusion of eternally rising prices will be smashed. Thereafter, expectations will adjust, housing euphoria will be replaced by depression. Speculators, buy-to-yet merchants and other over-leveraged homedebtors will start to panic. It will start slowly at first, but housing inventory will begin to rise.
The story then shifts over to the wider economy. Even stagnating house prices should be enough to send the UK economy into a sharp slowdown. In large part, recent economic growth has been due to mortgage equity withdrawal, which in turn depends on ever rising house prices. In future, banks will be reluctant to give out personal loans if the value of the underlying collateral is falling. Without the mortgage equity withdrawal, UK consumption will slow, and it will take economic growth down with it. Unemployment will rise, mortgage defaults will increase and the housing prices.
However, the Bank of England is about to accelerate this chain reaction. Years of easy credit has pushed up inflation. The Bank needs to raise interest rates. There is nothing like a credit tightening to burst a speculative bubble.
So, the great housing crash of 2007 has begun. Like all housing crashes, it begins slowly, and it is greeted with denial. Real estate agents will reassure us that the slowdown is only temporary and that house inflation will shortly resume its terrible upward trajectory. They will cite the lack of supply and unsatisfied demand. However, affordability is the key. For many Britons, mortgage payments are eating up half of their post-tax income. There is nothing left to drive the bubble forward.