The British Ounce Toppled by Housing Woes

Source: Financial Sense

"Economic events in the United States often provide a taste of what’s around the corner for the British economy. Both countries run large external trade deficits, and much like the US, the British economy has been expanding on little else than the availability of easy credit and asset price inflation in the housing market. The ties between the US and UK run even deeper. About half of the profits for FTSE companies come from overseas, and 15% from US-based affiliates.

Imaginative lending practices fueled a doubling of British home prices over the past six-years, the key engine of growth for the world’s fifth largest economy. But British borrowers now face a perilous situation where their home values are tumbling, and the local banking oligarchs are lifting their lending rates in order to recoup big losses of up to 20 billion pounds in toxic sub-prime mortgages.

Little of the Bank of England’s (BoE) three rate cuts since December have been passed on to debt strapped consumers, now locked in a genuine credit crunch. “Credit conditions have tightened and the availability of credit appears to be worsening. The disruption in financial markets could lead to a slowdown in the economy that is sufficiently sharp to pull inflation below target,” explained the BoE in order to justify its quarter-point rate cut to 5.00 percent..."