Britain may offer clues to direction of housing prices

LONDON — What will happen when America's housing bubble can't expand any more? For answers, homeowners and buyers might look to Britain.

Housing prices here have risen 165 percent over the past decade, making it one of several countries in Europe and elsewhere that have outstripped even the soaring U.S. market.

In recent months, however, those prices have been stagnant or even dropping. Some studies show that the housing market may be overvalued by as much as 25 percent in Britain and that it can take eight weeks or longer to sell a property here.

Some real estate experts warn that Britain could be among the first dominoes to drop in a global collapse in property prices.

Many point to Australia, where the once-booming property market has been in the doldrums for the past 18 months or so. In Sydney, the average house price has fallen about 15 percent since the end of 2003, according to the Commonwealth Bank of Australia.

But most experts here — and most ordinary people — appear much less worried.

"At the moment, we expect a slowdown but not a crash," said Richard Donnell, head of residential research at the FPD Savills real estate agency in London.

He said Britain is entering a new era of low growth in house prices.

"I'd say we'll see low single-digit house price increases in the next few years," he said. "Some people say there will be a 20 to 30 percent correction, but I don't see it."

Liam Bailey, head of residential research at the Knight Frank real estate agency in Leeds, said the market definitely has peaked, at least in southeast England.

"We have had 10 years of really strong growth with prices doubling or even tripling in many parts of the U.K.," he said. "There has been much more of a property boom here than there's been in America. But historically the market is more volatile here generally than in America."

He said that homeowners have to remember that even if prices fall by 10 percent "it only puts one back to where they were a year or so ago."

Ordinary people seem sanguine as well.

"I'm not really worried that prices will drop dramatically," said Veronica Cotgrove, who owns a home in central London. "Central London properties will always sell. It just might take longer to sell right now."

Sherry Kerrigan decided to rent after moving here from Summit, N.J., earlier this year, partly because she feels the market is on a downward trend for sellers.

She said that if she were to buy a house, she'd be afraid she wouldn't be able to sell it at a decent price a few years from now.

"I already am seeing loads of for-sale signs in London right now," she said.

One woman who did buy a home here, Jody Friedman, said she realizes she may not be able to recoup her investment, since she bought when prices were at their highest.

"But I still think properties in this country are always going to sell because there's such a shortage of space here," she said.

Indeed, compared with Britain and other countries such as Spain, France, Ireland and Australia, the U.S. property boom of recent years has been mild.

Compared to Britain's 165 percent increase, U.S. housing prices have risen 86 percent since 1995, according to the Office of Federal Housing Enterprise Oversight. Some U.S. localities have seen much higher increases, and others much lower ones.

Americans might glean a lot of insight into future prices by looking into the British crystal ball.

In Britain, house prices have flattened out over the past year partly because first-time buyers are being priced out of the market. First-time home buyers made up 38 percent of the market in 2002, but make up less than 29 percent of the market today.

Also having an impact on house prices is less demand from investors. So far in 2005 there have been less than half the number of purchases by people who intend to rent out the homes, rather than live in them, than there were last year by this time.

If the same trends are seen in the United States, it could be a sign that airborne prices are coming in for a landing — or worse.

Americans have another good reason to pay attention to the housing market here and in other countries.

The international housing boom has been fueled by low interest rates. As homeowners across the globe have locked in mortgages at low rates, the savings have been funneled into consumer spending. And that spending has helped keep the economies of the United States and other countries humming along in recent years.

That's why Americans may be cheered by some good news on the horizon for the British market.

While interest rates on the Continent have hovered at about 2 to 3 percent in recent years, the Bank of England is widely expected in August to slash Britain's 4.75 percent rate for the first time in two years.

"When this happens I think a lot of people, both buyers and sellers, will take it as a spur to get on and put things on the market," said Ed Mead, a director at Douglas & Gordon, a real estate agency in London.

"Buyers will get their choice, and with even lower interest rates we are likely to see a pretty large increase in volumes," he said. "There are a lot of people out there waiting to buy."