UK crash could be worse than USA

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by Kay Murchie

According to research from analysts Capital Economics, the modest fall experienced in UK house prices could ultimately be more severe than that experienced in the US.

Capital Economics warn that while prices have only moderated to date in the UK, the close parallels between consumer spending and property prices could prove to be a key indicator of the future direction of the property market.

To date, property prices have slowed only slightly and are still increasing in some areas, particularly Scotland. However, the organisation believes this is about to change.

Consumer confidence has declined to all-time lows this month with shoppers very price-conscious and reluctant to splash out on major purchases, according to The British Retail Consortium (BRC). It is this decline in spending and confidence which worries Capital Economics.

The organisation expects UK consumer spending to increase by just 1.5% this year, a marginally bigger rise than is likely in the US, according to Capital Economics.

US spending growth may start to recover next year but UK spending growth looks likely to slow further, said Vicky Redwood of Capital Economics.

Furthermore, there has been a significant reduction in lending following the credit squeeze, with many lenders reducing their product ranges. Consequently, finance for house purchases are becoming increasingly rare.

This will a problem to first-time buyers and those 1.4 million looking to re-mortgage after their fixed-rate deals expire this year.

Having borrowed far more than their American counterparts, total household debt in the UK is currently at the equivalent of 175% of household disposable income, compared with just 128% in the US.

However, on the brighter side, the UK has not experienced the boom in sub-prime lending seen in the US, where thousands of homeowners have been defaulting on loans.

The Council of Mortgage Lenders (CML) is predicting a 50% rise in repossessions this year - the equivalent of 45,000 properties, but this still only represents a small fraction of the market.