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Friday, May 06, 2005

UK Housing Jitters

Staying with the UK for a moment, three recent articles in the press have drawn attention to the current delicate state of consumer spending and the housing market in the UK.

The first of these in Bloomberg on Tuesday suggests that retail sales are weakening considerably:

"The Confederation of British Industry said today its gauge of retail sales recorded the steepest drop since July 1992, when Britain emerged from its last recession. A separate index of purchasing managers conducted by NTC Research Ltd for the Chartered Institute of Purchasing and Supply fell to 49.5 from 51.6 in March, the first reading below 50 since June 2003.....

'The slowdown in consumer spending, which commenced in mid- 2004, seems to be getting more pronounced,' said Holger Schmieding, co-head of European economics at Bank of America in London.

Then the Economist started to worry about house prices:

"House prices are cooling in response to a steep decline in activity in the housing market. In March, 91,000 mortgages were approved for house purchases, somewhat more than in February but a quarter fewer than a year before. Turnover is likely to stay sluggish as potential sellers who are unwilling to accept lower prices respond by taking their houses off the market.

Last year, the Bank of England suggested that the usual link between house prices and consumer spending had weakened in recent years. Household consumption had grown respectably but not spectacularly at a time when house prices had been soaring. However, the link with retail sales seems to be re-asserting itself as the housing market turns sour".

Today investment bank AMB Amro publish a forecast which suggests that house prices may fall by 10 per cent by the end of the year, citing the fact that mortgage approvals are down 35 per cent year-on-year as evidence of a serious 'cooling off'. The bank argues that the consumer slowdown is set to accelerate, leading to a vicious cycle of lower spending, which in turn leads to job losses and fresh spending cuts.

" Half a million British jobs will be lost over the next three years because of a 'dramatic decline' in consumer spending, a leading investment bank warned yesterday.

A major slowdown would be triggered by falling house prices, higher interest rates, rising unemployment and excessive debt levels, ABN Amro said.

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