UK crash could be worse than US, experts warn

Thursday, 20 March 2008 12:00 AM

The modest correction seen in UK house prices seen to date could eventually be more severe than that seen in the USA, according to research from analysts Capital Economics.

While prices have only moderated to date in the UK, the organisation warns the close parallels between consumer spending and house prices could prove to be a key indicator of the future direction of the domestic property market.

Thus far house prices have slowed only marginally, and are still rising in some areas, including Scotland - but this could be about to change.

The British Retail Consortium (BRC) finds during March: "Consumer confidence has fallen further to all-time lows. Shoppers are still very price-conscious and reluctant to splash out on major purchases."

It is this dip in spending and confidence which worries Capital Economics.

"We expect UK consumer spending to rise by just 1.5 per cent or so in real terms this year, a slightly bigger rise than is likely in the US," said

"But whereas US spending growth could start to recover next year, UK spending growth looks likely to slow further. With both countries the main risks lie to the downside," said Vicky Redwood, UK economist at Capital Economics.

There has also been a sharp reduction in lending; following the credit crunch, with mortgage products removed the market and finance for house purchases becoming increasingly scarce.

This will prove detrimental to first-time buyers and those looking to remortgage following the end of a fixed-term deal.

Finally, Global Economics also points to an indebted British public, having borrowed far more than their American counterparts. Total household debt in the UK is now standing at the equivalent of 175 per cent of household disposable income, compared with only 128 per cent in the US.

However, some indicators also point to a brighter future in the UK.

This country has not seen the boom in subprime lending witnessed in the US - where thousands of homeowners have been defaulting on loans, unable to meet repayments.

To date the UK has only seen moderate disruption. While the Council of Mortgage Lenders (CML) is predicting a 50 per cent increase in repossessions in 2008, some 45,000 properties, this still only representing a tiny fraction of the market.

The shocks to the UK's financial services industry have also been less severe.

While Northern Rock is an obvious casualty of the credit crunch, funding to other institutions has thus far proved sufficient.

In contrast America's fifth largest investment bank, Bear Stearns, was unable to meet funding requirements over recent weeks - resulting in initial support from the Federal Reserve and eventual takeover by JP Morgan.

The Bank of England has also only cut interest rates by 0.5 per cent in the previous four months, compared to the dramatic cuts made by the Federal Reserve, bringing the cost of borrowing down to just 2.25 per cent from over five per cent in just over a month.

There is also a marked shortage of property in some areas of the UK, ensuring demand remains high, coupled to strong employment figures which should also assist buoyancy in the market.

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• uk property news