if the uk housing bubble was to burst and housing cost fell by 20-40%
over 2-3 years as predicted by some doom mongerers. how would this
affect the
economy especially the stock market?

---

Clarification of Question by stueyb-ga on 11 May 2004 19:50 PDT

or for a simple answer......

if there was a housing market crash will the stock market suffer as a result.

It's not just the UK ... Here's a disaster scenario that I received
the other day from the US:

As you read Mr. Worden's message, think about:
 
1. Americans in aggregate are spending 120% of their income!
 
2. We are more indebt than at any time in history and borrowing more
at a furious rate!
 
3. The savings rate in America is almost nil.
 
4. The Federal Reserve is printing huge amounts of new dollars,
creating them from thin air. The new dollars contribute to rising
inflation.
 
How will we handle bad times? I am afraid not well at all.
 
Don Stacey
 
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

A TERRIBLE FOREBODING

By Carl F. Worden

Ladies & gentlemen:

Most of you familiar with my writings know that I am a financial
consultant involved in just about every aspect of economic and
financial proceedings, and I must tell you I have a terrible feeling
of foreboding regarding the future of American prosperity.  The threat
is imminent, and much closer than most Americans can possibly foresee.

My associates from every corner of America have consistently confided
to me that the primary driving force in the American economy right now
is people refinancing their homes at low interest rates, and
withdrawing the equity to make purchases like cars and appliances, and
to pay off credit card debt.

Those of you old enough, and those of you who are younger, but
cognizant of the historical events leading up to the crash of 1929,
will recall that people were buying stock on credit ? credit that
became immediately due and payable when those stocks lost their value.
 Thousands of people lost their homes put up as collateral in the
ensuing catastrophe, and wound up living in cars and on the streets
and in soup lines.

That is exactly what is going on right now.  Further, there are sharp
increases in home purchases in various areas of the United States,
driven not by people buying homes to live in, but to purchase a home
on pure speculation that they will reap a huge profit by re-selling
the home a month or two later ? often to another speculator. 
Economically, it is a disaster waiting to happen, and these home
speculators are playing a reverse game of musical chairs in which you
do not want to have a seat (read overpriced home) when the music stops
? as in when the buying frenzy suddenly ends and prices drop.  All it
will take is a Federal Reserve announcement of an interest rate
increase, and I see that coming very soon.

Couple this trend with the fact fuel prices are soaring, making the
price of everything from groceries to basic household goods, jump
substantially due to transportation costs.

This trend cannot go on without harsh economic consequences, including
double-digit, runaway inflation -- and the inevitable rise in interest
rates.  If interest rates jump just one or two percent, the entire
basis for our existing economy through refinancing of homes will come
to a screeching halt.  If the Federal Reserve refuses to raise
interest rates, inflation will explode unchecked.

It?s a no-win situation, no matter how you look at it.

What?s going on right now isn?t very different from the events leading
up to the crash of 1929.  People were betting on the come line that
stock values would keep on rising forever, just like people of today
are betting their home?s equity will keep rising forever, but this
cannot continue without a drastic correction that can be brought about
by any number of unforeseen events.  It?s like a house of cards in a
high wind, and you never know when the breeze will bring the whole
delicate structure to ruin.

I do not understand why the Bush Administration is not trying to do
something about these exploding fuel costs.  $2.00 + per gallon for
diesel??  Diesel is just about the most cheaply produced fuel, yet its
cost at the pump is equal to or higher than regular grade gasoline
here in Oregon!  Clearly, the oil companies are profiteering and
cooperating in illegal acts of trust with one another, yet the Bush
Administration is taking no hard federal action to even investigate,
let alone bring prosecutions that send a strong message.  I don?t get
it, and I don?t understand why there has been no massive media or
public outcry for action.

Foreclosures and bankruptcies all across America are already spiking,
despite government assurances that we?re all enjoying a growing
economy and a promising job market.  Those government assurances are
all a big, fat lie!  The unemployment figures are completely
unreliable, since those dropping off the unemployment compensation
rolls are no longer counted, even if they remain unemployed after
their benefits run out.  It?s all a big, fat lie, and I have a
terrible sense of foreboding of what is to come, because this economy
is not built with underpinnings that can withstand even the slightest
breeze.

Carl F. Worden

We have long had prophets of gloom and doom, such as Mr. Wooden. I
recall a book named "collapse 1995" copywrite about 1992. The world
has been fortunate to have only adjustments/resessions since 1929, but
an even worse than the 1929 depression could occur tomarrow or a
decade from now. Yes there is a very slight possibility that we will
have ten more good years. Since the USA imports rather than produces
goods, the export countries will suffer greatly, if the USA has a deep
depression. Scarsely anyone will benefit from a world wide depression
which could last decades, so the rich and powerful internationalists
are determined to avoid such a depression or even a mild recession. I
suspect the corrective tools have been inadequit for decades, so we
are lucky to have avoided a crash to this date. The mostly boom we
have enjoyed for almost 60 years will end eventually, and suddenly.
Most locals have survived several bubbles and bursts of housing
prices, so you should not be conscerned unless the bubble is is more
than 20% for most of the UK.
 Typically falling housing prices, mean people delay house purchases
until they think prices are rising again, so they buy more stock which
bids up stock prices. Stock prices go down when people start buying
houses again except there are many other factors that effect stock
prices besides housing price trends.
 In a severe depresion, prices of everything, even gold, will drop in
terms of the real value of the money. Some, perhaps most currencies
will experience severe inflation along with severe depression of the
economy.
 In mild housing bubble bursts, the economy in general will decline
along with housing prices, even while stock prices are increasing. I'm
sure someone will want to refute some or most of my analysis.   Neil

Neil

I don't disagree with your Comment.

Doomsters have been predicting the collapse of the Western economies
for decades but somehow (despite the Great Depression of the 1930s)
they continue to survive.

However, these days, we are extremely dependant upon technology and
highly vulnerable to technological disasters.

There is the potential for the end of the World as we know it and it's
sure to happen some day.

But, in the meantime, let's enjoy whatever time is left!

My own view is that we are very lucky to have lived in what I believe
have been the best of times.

Mike

Real estate and housing is no different from any other monetizable
asset in principle. When the market value of what is most people's
major asset drops sharply (as will happen in all areas where there has
been "bubble" - rapid, significant appreciations in price), these
people will not be able to finance their present levels of consumption
or investment.

Most households and individuals in these markets are in heavy debt
already and have been funding their consumption and investments
through refinanced mortgages at historically (and artificially) low
interest rates in economies running ridiculous monetary and credit
expansion policies.

So when the bubble pops, as they all eventually do, there will be much
less consumption and investment expenditure. Both the economy and the
stock market will suffer accordingly. The situation, however, is much
worse in the US than UK, as the monetary and credit expansion has been
enormous in the US. If this triggers another decline in the US dollar,
foreign investors and banks will unload US dollar assets, obviously
including stocks.

If the UK stock market has an insurance policy it may be simply that
FOREIGN (not domestic) capital will need a RELATIVELY safe harbour and
it may be seen as one.

Further reading:

http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html

http://www.findarticles.com/cf_0/m1093/6_45/95629328/p1/article.jhtml

http://www.cepr.net/columns/weisbrot/housing_bubble.htm

http://www.mises.org/freemarket_detail.asp?control=450&sortorder=articledate

Great Links, Hobbes26-ga

But SCARY!