-->Housing boom faces global meltdown


THE global housing boom that has propped up the world economy in the face of falling share markets in the past few years is teetering on the edge of a crash, it was claimed yesterday, writes Frank O’Donnell.

House prices in Australia, Ireland, Netherlands, Spain, Britain and the United States will fall by at least 20 per cent over the next four years, according to a report in the Economist.

The trigger for a house-price crash could be a relatively modest increase in interest rates because total levels of household debt are at record highs.

Pam Woodall, the magazine’s economics editor, said it was wrong to assume rate rises on the scale of the late 1980s would be required to hit house prices, as the major indicator for the residential market - the ratio of house prices to average income - is at record highs in the US, Australia and the UK.

She said the Economist had calculated that it would take four years for house prices to return to their long-term equilibrium if they fell by 10 per cent in the US and 25 per cent in Britain and Spain.

The US in particular has seen the biggest rise in house prices in its history since the mid-1990s, and a sharp fall in the market in the largest global economy would tip the world into recession.

"The US has very little fiscal or monetary ammunition left to support its economy if house prices collapse," she said."If the US falls, it would be the first global property bust in history."

Property is the biggest business in the world, accounting for 15 per cent of global gross domestic product, with assets of $50 trillion, compared with $30 trillion in shares.

So swings in house prices have a much bigger impact on economies, through consumer sentiment and demand, than fluctuations in stock markets.

Another key residential market indicator, the ratio of house prices to rents, is at record highs in several economies as rents rise more slowly than prices.

A potential trigger for a housing crash in Britain could be sales from the booming buy-to-let market, which reached £27 billion at the end of 2003.

Ms Woodall said in many cases rental income is now insufficient to cover mortgage payments, and the expectation of compensatory capital gain increases is diminishing, with house prices in some parts of London already falling.


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