Recently, I wrote about my trip to London, England and how housing prices there, in my opinion, were getting out of control. I commented about how home prices in London had peaked and how the market was starting too cool.
After five consecutive rate increases by the Bank of England, the question became a matter of not “would prices start to ease?” but “by how much would home prices start to fall?”
I was anxiously anticipating the August UK homes sales figures to be released, and as anticipated, activity has cooled substantially:
— UK house prices fell by 0.6% in August from the month before. This was the first fall in prices since August 2002.
— UK house prices are now rising at their slowest rate in three years.
A UK think-tank by the name of Capital Economics was quoted as saying its prediction of a 20% fall in UK house prices, beginning in the second half of 2004, was on track.
Alex Bannister, chief economist at UK-based Nationwide said, “The weight of evidence suggests that housing market activity has slowed more markedly than price.” Of course, I say. First activity slows, and then prices follow down.
Why should North Americans care about the prices of homes in the UK? Because if it can happen there… it can happen here. The bulls on UK housing told me house prices in the UK can only rise because supply is limited. But, as now is being demonstrated, limited supply, at a certain point, does not necessarily mean higher prices.
Sales of existing U.S. homes fell by 3% in July. Mortgage applications in the U.S. have also begun to fall while the inventory of newly built homes is rising. In Toronto, which is my Canadian gauge of activity, the average price of a resale home has actually fallen 6.5% in the last three months. I write about the housing market for several reasons. First, to help real estate investors better plan for their future investments. Second, to help home buyers that plan to trade-up decide on timing. And third, but most importantly, because construction and real estate has been the last “proverbial” leg left holding up our economy. If activity in the housing market starts to deflate, our economy will be in real trouble.