UK PROPERTY CRASH IS CANCELLED? DON'T BET ON IT

[Bloomberg, November 22nd]: Everybody relax. The British housing crash has been canceled. We can all get back to browsing real- estate brochures, and calculating how much richer our house has made us in the last five minutes.

Who says? None other than Mervyn King, the governor of the Bank of England. Last week, King played property pundit -- and a bullish one as well. ``Housing activity appears to be picking up to its long run average,' he said in a speech in Birmingham, England.

His optimism is premature. The housing-market crash of the early 1990s was stretched over years, not months. In the U.K.,

unemployment is rising. So are personal bankruptcies. And growth has slowed dramatically. The British property market still faces a rocky year.

``We are still a bit skeptical,' said Ed Stansfield, an economist at London-based consulting firm Capital Economics Ltd., in a telephone interview. ``The market has picked up, but whether that is the beginning of the end for those of us who thought there would be a much larger correction, it is still too early to say.'

The latest evidence from the U.K.'s volatile property market would seem to support King's view.

British house prices increased 1.3 percent in October, the fastest rate in 15 months, according to the Nationwide Building Society. The property Web site Rightmove confirmed that view with a report this week showing November prices advancing 0.8 percent, the second monthly increase in succession.

What's Changed?

Go back to the first half of 2005, and the contrast couldn't be starker. Then it was all doom and gloom. HBOS Plc, the U.K.'s biggest mortgage lender, said home values declined 0.5 percent in February.

So what's changed since then?

To listen to King, it sounds like a master-class in economic management by a central bank right on top of its game.

House prices were rising way too fast in the U.K. At their peak, prices were accelerating at a rate of almost 25 percent a year. That was fuelling a consumer boom, and risked sparking inflation. A series of increases by the Bank of England took the benchmark interest rate up to 4.75 percent. That was enough to cool the real-estate market. Another nudge on the rudder lowered borrowing costs to 4.5 percent, heading off a slump.

``We have seen a period of very rapid inflation until mid- 2004 and then the rate of increase came down to close to zero,' King said in his speech. ``For us, that is an attractive outcome.'

Recession Risks

When it started trying to moderate house prices, the bank was aware of the risks. Too little action to tame house-price inflation, and the bank would be seen as ineffective. Too much, and a bursting housing bubble could cause a recession.

Yet the central bank shouldn't be patting itself on the back so soon. ``The big picture has not changed,' Stansfield said. ``Valuations are still more stretched than they have been at any time since the early 1990s.'

Quite so. ``Our long-held negative views on the housing market have stemmed from two factors,' said ABN Amro Bank NV economist James Carrick in a note to investors. ``First, house prices are unaffordable for first-time buyers. They cannot afford the deposit or the monthly mortgage payment. Second, rental yields have fallen below the mortgage rate.'

Unemployment

There are three issues that the housing market still has to face. First, joblessness in the U.K. is still climbing. The number of people claiming unemployment benefits rose for a ninth month to 890,100 in October, according to the Office for National Statistics, stretching the longest period of increases in almost 13 years. British companies are now firmly in cost-cutting mode. It is when people lose their jobs that they can't pay the mortgage anymore, bringing prices under most pressure.

Debt levels are causing real pain. Insolvency declarations by people in England and Wales rose 46 percent in the third quarter from a year earlier as consumers struggled to cope with their borrowings. Meanwhile, figures released last month showed the number of court actions to repossess homes surged to a 12- year high of 29,991 in the third quarter.

There is only one conclusion to be drawn from those statistics. People have borrowed too much and are struggling to meet the payments. For everyone declaring bankruptcy, and for every home repossessed, there are probably 10 others close to the edge. That is still a dark cloud hanging over the market.

Lastly, U.K. growth remains weak. The economy grew just 0.4 percent in the third quarter, and is heading for its slowest expansion in 13 years. Britain is now near the bottom of the European growth league.

Erratic Price Movements

House prices, like in any market, never move in a straight line. They didn't during the housing crash of the early 1990s. According to ABN Amro figures, house prices dropped sharply in 1989, rebounded at the start of 1990, before resuming their decline. There were three false rallies, followed by more falls, before it stabilized in 1993.

There is no reason the market shouldn't be following that pattern right now.

King is entitled to claim credit for steering the British housing market toward a soft landing. Yet it is too soon to say the job is finished. Markets have a nasty way of snapping back at anyone who claims victory over them -- and U.K. property isn't immune to that.