by Calculated Risk on 5/13/2005 01:51:00 PM

As a follow up to my earlier posts this week on the UK housing market (here on Angry Bear and here), the Bank of America has issued a report warning of potentially serious consequences from the housing bust in Britain. I've argued that Britian might be a little ahead of America in this cycle, and that America might see similar problems in the near future.

A few excerpts from the Telegraph article:

"Bank of America warned yesterday that Britain could face a "nightmare scenario" as collapsing house prices combined with the pain of tighter fiscal policy."

"...the debt financed spending spree of consumers is petering out while the almost unprecedented surge in government spending looks increasingly unsustainable"

"Skyrocketing house prices" had enabled consumers to draw down "staggering" levels of mortgage equity for spending. But the "multiplying" effect of the boom was running out under the delayed impact of earlier rate rises.

"We cannot rule out a nightmare scenario in which a decline in consumption caused by a sudden correction in house prices would lead to an explosive rise in the fiscal deficit that would have to be addressed by a tighter fiscal policy,"

Stephen Robinett once wrote: "Speculative bubbles go on longer and end quicker than most people expect." When the bubble ends, it will probably happen very quickly. Most likely prices will first stablize and then deflate slowly, but transaction volumes will drop precipitously.