Some analysts appear to be looking to the U.K. as a preview of what a U.S. real estate cool down might look like. OK, here's what the Bank of England's Monetary Policy Committee has to say in the current Inflation Report:
Since the middle of last year, house price inflation has slowed across the United Kingdom. During the past three months, the rate of monthly house price inflation has been negligible according to the main lenders. Price balances recorded by the Royal Institution of Chartered Surveyors have been broadly flat during the past few months, indicating that monthly house price inflation has stabilised. But the House Builders Federation survey suggests that house price inflation has fallen further...
Chart 1.7 shows indicators of housing market activity early in the house purchase chain. These include data on site visits and reservations of new homes. After falling sharply in 2004, most of these indicators appear to have flattened out recently. The same is true of indicators later in the house purchase chain such as the level of sales relative to the stock of housing on estate agents’ books (Chart 1.8). Taken together, Chart 1.7 and Chart 1.8 suggest that housing market activity may have
stabilised.
Here are charts 1.7 and 1.8:
How might this have affected to consumer spending or, more specifically, consumer borrowing to finance spending? Perhaps less than meets the eye, says the MPC:
Households’ borrowing growth has also increased sharply in recent years... But since the middle of 2004 thatgrowth has eased. In large part, the deceleration has been associated with developments in the housing market that affect secured lending: mortgage approvals have fallen back and house price inflation has slowed.
Within secured lending, there has been a marked fall in mortgage equity withdrawal (MEW)... One form of MEW occurs when an individual increases the size of the
mortgage on his or her home, and uses that additional loan to finance spending. So, on the face of it, the scale of the drop in total MEW could indicate that households have become very reluctant to borrow to consume...It is impossible to identify precisely how much of the recorded fall in MEW reflects property sales, and how much reflects active borrowing...
One way to assess how much of the drop in total MEW reflects active borrowing is to examine the value of loan approvals by households that take out a further advance on their property. These ‘other loan approvals’ should provide a rough guide to
MEW funds released solely by active borrowing. The value of other loan approvals eased in 2004, although by significantly less than total MEW (Chart 1.11). So these data indicate that consumers’ reluctance to borrow may have been much less
pronounced than the headline MEW figures suggest. The most recent data show that the value of ‘other loan approvals’ edged up in 2005 Q1.
Here's chart 1.11:
The Report continues:
Other indicators, such as developments in unsecured credit, suggest that consumers’ appetite to borrow for spending has been undiminished during the past year. In March, annual growth of unsecured lending was 13.5%, broadly in line with
growth in 2004...
Thus far, the MPC does not appear particularly concerned about fragility in household balance sheets.
... the effective lending rate — that is, the average interest rate paid by households on their outstanding loans — has increased during the past year. That will have boosted debt servicing costs.
... the effective lending rate has risen by significantly less than the repo rate. Some of that reflects unsecured rates, which have remained broadly flat during the past 18 months despite the repo rate increases. But it also partly reflects the presence of fixed-rate deals in the stock of mortgages: they tend to smooth the impact of monetary policy on the effective rate...
Other indicators of financial pressures in the household sector are mixed. The number of households with mortgages in arrears remained historically low. And although the number of applications made by lenders to repossess homes increased, actual repossessions also remained very low. Personal insolvencies in England and Wales have continued to rise... As outlined in previous Reports, that may partly reflect changes to the legal regime. Insolvencies have also been increasing in Scotland where there have been no recent legal changes. But... insolvencies there have been on an upward trend for some time.
The full set of charts produced in the Inflation report are avaulable in powerpoint format here.
UPDATE: Calculated Risk carries a warning on a housing bust from the Bank of America.