Asia Times Online :: A tale of two downturns

Asia Times Online :: Asian news and current affairs:

I think Britain and much of Europe are 6 to 18 months behind us in this recession. We will see what happens when all of the worlds largest economies are down - how will to people react?

"One reason for Britain suffering a deeper recession than the US is that its house prices got more out of line. Whereas in the United States, the house price to income ratio peaked at 4.5 times, against a long-term average of about 3.2, in Britain in 2006 that ratio peaked at around 5.5 times. Housing is more tax-advantaged in the United States, since mortgage interest payments are tax deductible, unlike in Britain. Hence the equilibrium British house price to income ratio would appear to be about three times, marginally above the 2.7 times level of 1970, when the British housing market was close to equilibrium. That implies that an average fall in real British house pieces of 45% is needed to bring the market back into equilibrium, considerably larger than the 29% drop needed to bring the US market into equilibrium.

Those figures may seem startlingly high but remember: the average Tokyo house price dropped by no less than 70% between 1990 and 2005, as Japan's 1980s stock and real estate bubble deflated. Thus a 45% drop is perfectly within the bounds of possibility. The US housing market appears well on its way to the necessary 29% correction, with the Case-Shiller house price index already down 18% since late 2006. Conversely, the British market has only just begun to drop in price, with current"