Thursday, October 13, 2005

Roger Bootle: Bubble that threatens to send the world economy into recession

Roger Bootle an economic adviser to accountants Deloitte & Touche LLP and a former adviser to the U.K. Treasury described the relationship between housing and the economy as 'symbiotic.' As Bloomberg News reports on October 13th:

In a revised edition of his book, ``Money for Nothing.'' As the housing boom ends, consumers will feel poorer and pare spending, driving up unemployment, he said.

``Like the earlier bubble in shares, the extent of overvaluation is different in different countries, but this is a global phenomenon,'' he wrote. ``In the end, this bubble may be more serious than the primary bubble in shares. When it bursts, the world will tremble.''

U.S. sales of previously owned homes surged to the second- highest level on record and prices reached an all-time high in August, spurred by job growth and interest rates within a percentage point of historic lows, the National Association of Realtors said on Sept. 26.

Urban land values in Spain surged 44 percent last year, central bank data show, fueling a spending boom that has helped Europe's fifth-largest economy expand three times as fast as the euro region this year.

The U.K. economy, Europe's second-largest, grew at its slowest pace in more than 12 years in the second quarter as the end of a property boom that saw house prices triple in a decade weighed on consumer spending. HBOS Plc, the nation's largest mortgage lender, predicts house prices will fall 2 percent this year after they surged 15 percent in 2004.

Less Confident, Less Spending

In the U.K., ``without a huge increase in the value of their properties, consumers have felt less wealthy and less confident, which implies less spending,'' Bootle said. ``And the same will surely happen in the U.S. soon.''

The Bank of England, which cut its benchmark interest rate to 4.5 percent in August, the first reduction in more than two years, may have to cut rates to below 3 percent ``to prevent the bursting of the housing bubble from causing the economy to stagnate, or decline,'' said Bootle.


  1. Read this piece someplace else- in my google news alerts sent to me via e mail for 'housing bubble' Very good article, and much truth. For those who cannot fathom a decline in prices and a recession, this points out the dire danger we are all in. I have reduced the amount of money in my mutual funds, and now am about 80% in cash- I frankly feel a recession will begin in the spring or summer of next year- the drag that housings fall is going to leave many breathless.

  2. "I frankly feel a recession will begin in the spring or summer of next year- the drag that housings fall is going to leave many breathless."

    I totally concur.

  3. We should have had a recession in 1998. Our policymakers keep pulling all kinds of credit-inflating stunts to push it off (stock bubbles, housing bubbles). As a result, we never have the cleansing recession we need, and the one we have coming is going to be very bad. We make very little in this country anymore. Our trade and financial policies need a complete overhaul. Unfortunately, such a process will probably cause a recession.

    Imagine if Americans started saving, insisted that finance companies have some reasonable regulations (like they did before the mid-90s), and insisted that our trading "partners" import some of our goods or lose US market access. Short-term, the economy would probably collapse. But it needs to be done.