Eric Reguly

London — From Tuesday's Globe and MailPublished on Monday, Sep. 13, 2010 7:12PM EDTLast updated on Monday, Sep. 13, 2010 7:45PM EDT

It’s always been easy to flip a house or flat in Camden Town, the lively North London neighbourhood favoured by young professionals in creative industries who like their streets jammed with gastro-pubs as well as supermarkets.

Camden Town did not escape the post-credit-crunch downturn, of course. But housing prices recovered somewhat between mid-2009 and mid-2010, convincing real estate agents that the worst was over. The good feeling didn’t last long. By late summer, the sense of gloom had returned.

“That’s when we started reading headlines about the double-dip recession and the market slowed down,” said Matt Poore, associate director of the Chesterton Humberts estate office for Camden Town and Regents Park. “The current fear is the economy.”

Mr. Poore said the prices of expensive properties seems to be holding up, but the low end of the market (which can mean an asking price equivalent to $500,000) is already getting trashed as first-time buyers vanish.

The question on everyone’s mind is whether a fresh housing slump will push the already mauled British economy into double-dip recession. The answer depends on a great unknown – the severity of the housing downturn. “It looks like the market is rolling over again,” said Sam Hill, director of United Kingdom fixed-income strategy at Royal Bank of Canada’s investment arm in London. “Historically, you generally do not see double-dip recessions, but it will feel like a double dip.”

The drop off in buying and selling and the suddenly waning prices have already been captured by housing surveys, leaving no doubt a downturn is under way. The widely followed Nationwide Building Society housing index showed that average national prices went unchanged in June, followed by a 0.5 per cent drop in July and a 1 per cent drop in August.

Housing market slaughters are relatively rare events in Britain. The last truly bloody one occurred between 1989 and 1992, when millions of homeowners suffered from “negative equity” – properties worth less than their mortgages. But anyone who had the courage to buy at that time made easy money. The British housing boom, driven by ample credit, falling mortgage rates, strong economic growth and London’s emergence as the international financial centre of choice, propelled house values up by 150 to 200 per cent over the next 15 years.

The rise was well in excess of both the inflation rates and income growth, meaning the housing market was an accident waiting to happen, as home values shot well ahead of paycheques.

The peak came in mid-2007, about a year before the credit crunch and the collapse of Lehman Bros. According to a new Deutsche Bank report by George Buckley in London, the peak-to-trough fall was almost 25 per cent. The reversal came in the spring of 2009. Over the next year, house prices rose about 10 per cent.

Mr. Buckley is now predicts a 5 per cent price drop in the British housing market in 2011 “and generally falling real prices for a period beyond this.”

Economists can’t say any one factor is triggering what Deutsche Bank calls “a second wave down for housing.” Certainly affordability is still an issue. The house-value-to-income ratio is still out of whack, they say, even though prices are still below their 2007 peak. “Easy credit allowed asset values to inflate above relative income levels,” Mr. Hill said. “There are two ways to correct. Incomes have to go up or asset values have to come down.”

Mortgages, especially for first-time buyers, are hard to get because of tightened loan restrictions. But the immediate reason for the new slump appears to be fears that Britain’s economy will either tip back into recession or that growth will remain weak. Deutsche Bank’s last forecast for GDP growth in 2010 was 1.7 per cent, which is about half the German rate, though more robust than France’s and Italy’s.

Britons fear the effects of the austerity program being put in place by the Conservative-Liberal Democrat coalition government, which inherited a Greek-style budget deficit when it won the May election. Britain’s deficit, as a percentage of GDP, was 11.1 per cent last year and is expected to improve only modestly to 10 per cent this year (compared to a 2010 deficit of 8.1 per cent in Greece).

Faced with out-of-control borrowing costs – interest payments on the national debt are forecast to rise by an astonishing 40 per cent in the current fiscal year – Chancellor of the Exchequer George Osborne is planning a £113-billion ($179-billion) fiscal consolidation over the next five years, making it the most ambitious spending clampdown since the Second World War. While details of the cuts will not be known until Oct. 20, the Chancellor has made it clear that many government departments will need to lop 25 per cent or more off their budgets.

Labour unions say the deep cuts could lead to 200,000 lost civil servant jobs, meaning a large portion of the work force will not be bidding up house prices. On Monday, the British accounting firm BDO warned that confidence among British companies is evaporating again and that the economy may start contracting as early as the fourth quarter. Other economists say the lower pound and surprisingly resilient private consumption should be able to prevent a double dip, even if the housing market slumps.

But one thing is for sure: the cautious optimism about the housing market is vanishing. “People are a bit nervous and things have slowed down,” said Jack Shorn, an agent at Fitzroy’s real estate office in North London’s Highgate neighbourhood.