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UK: property boom faces collapse

It may not be scientific research but the word-of-mouth system around South East England last week was that the property boom was already in the grip of a downturn as the IMF issued a report saying that it was all rosy. Last year, the UK housing market, according to some reports, soared 25% by average house price value.

Some say that the average first time buyer must now find more than GBP80,000 for a home. The effect of this is that there is a continued drain away from the country to the towns where salaries are higher and this issue was heavily debated in parliamentary committees in the past few days. But the real thing that is causing a sudden surprise is the fact that the housing market has suffered a rapid decline in the past month.

In one case, a property in a road previously popular has been seen by only four viewers in six weeks and in another, it was sold only after the price was reduced by GBP8,000 - nearly 10% of the original asking price.

Of course, these figures mask some basic truths about the English (especially around London) and their property. First, they always talk up the value of it, second their estate agents do the same, third their lenders follow suit. Each of the three are willing conspirators in a madcap inflationary spiral. Buyers make their decision not on the value of the property to them, but on the expected value of it to others if the price increases continue. That "if" should frighten people off but they interpret it as an indication of a foregone conclusion.

The IMF does not consider the UK's rapid price rises as a bubble. They say in a report published earlier this month, that it is a recovery from previous low prices (it is difficult to see the UK's house prices as underpriced for many years) and an "overhang." The reality is that the property market is fed by the UK's obsession with house ownership, made worse by the realisation that, if one lives in an affluent area, one's home is likely to be the best available investment over the long term: and in a world where life assurance products reach under 25% of their expected value and the government says that the state pension will not provide basic support without recourse to other benefits, the idea of selling an expensive house to purchase a smaller less expensive one is seen as very attractive by many.

The same spiral happened in the late 1980s. The bubble burst leaving massive debt overhang that made much of the UK property market stagnate for more than five years. The underlying causes are similar - massive City bonuses were, until recently, fuelling demand for upmarket properties around London. This dragged along all other property in its wake. Last Christmas, the bonuses dried up. The confidence of consumers fell and they began to think twice about how far prices would be pushed on what amounts to rumour as to future value.

With the continuing rise in redundancies in the UK's financial sector the problems of the housing market are set to repeat the falls of the late 1980s and early 1990s. The scale, this time, may be different - prices fell, in some cases, by up to 50% and in many districts by 25% in a matter of weeks - but banks have not heeded warnings not to lend at or near 100% of the valuation applied by estate agents. Some have appointed in house valuers and others have a restricted panel but this has not seen the expected containment of rapid rises. Whilst Hong Kong and the USA have both issued warnings to bankers about different aspects of the property market risk, the UK has kept pretty quiet, perhaps because in an otherwise collapsing economy, only rising house prices were keeping alive the illusion that Britain is prospering.

The owner of a shipping business, who wanted to remain anonymous, said last week that his own research showed that some two million people left the UK last year, mostly to move abroad to work. WMLR's own informal research shows many small services businesses, especially those servicing the service economy, are struggling to make ends meet. And many professionals in and around London are giving serious consideration to cashing in their (currently) inflated houses and moving - in many cases out of the UK so depriving it of more revenue from the professional class. As they do, the supply of the top end property will increase and should add to the deflationary effects on the market. The nett effect of this is simple: in the aftermath of the property boom of the 1980s, many frauds were uncovered. It is probable that the same will result this time. And it is also likely that a considerable negative equity (or debt) problem will arise.

World Money Lau...