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Housing market on 'brink of collapse'

17 March 2004
The Economist conducted a series of surveys and concluded that the housing boom, which has propped up the world economy amid falling share prices in recent years, could be heading for a sharp fall.

Pam Woodall, economics editor of The Economist, told a conference organised by the Investment Property Databank this week: "House prices look seriously overvalued in Australia, Ireland, Netherlands, Spain, the UK and US and will fall by at least 20 percent in many economies over the next four years."

The magazine predicts that the trigger for a house price crash could be a relatively modest increase in the cost of borrowing, as consumer debt reaches record levels, Reuters reports.

Ms Woodall explained that it was wrong to assume that interest rate hikes on the scale of the late 1980s would be needed to burst the housing market bubble, as the ratio of house prices to average income is now at a record high in the United States, Australia and Britain.

The Economist conducted a series of global housing surveys and sector research over the past year and calculated it would take four years for house prices to return to their long-term equilibrium if they fell by ten per cent in the United States and 25 per cent in Britain and Spain. Subdued inflation could drag out any recovery in housing markets by keeping wage inflation low.

Ms Woodall warned that a sharp fall in the housing market in the US could tip the world into recession.