From nine months ahead to three months behind

At the height of the housing boom in the U.S. a few years ago, when it was clear to some of us that, despite what many were eager to believe, there still was no such thing as a free lunch and that a bill would surely come someday, the U.K. housing market was thought to be about nine months ahead of the U.S. housing market.

That is, while home prices in the U.K. began soaring toward the heavens almost a year before those in the U.S., they appeared to be leveling off and perhaps heading back toward terra firma.

Initial indications of flattening home prices and flagging retail sales were seen in early 2005 leading to a rate cut by the Bank of England later that year in an attempt to ward off a housing-induced economic slowdown.

The central bank's short-term rate was cut from 4.75 percent to 4.5 percent.

To the surprise of many, home prices then resumed their ascent (along with many other prices) and a year later the quarter point cut was reversed followed by a series of Alan Greenspan like baby-steps until the short-term rate stood at 5.75 percent in early 2007

During this time, inflation in the U.K. reached highs of near 10 percent for retirees while the government's overall measure of consumer prices remained lower, but not low enough for BOE President Mervyn King to avoid having to write an embarrassing letter to the Prime Minister.

Now, late in 2007, home prices appear to be faltering again, down for the third month in a row despite posting year-over-year gains of near 20 percent in London and almost 10 percent nationwide.

As a result of stalling home prices and when combined with ongoing difficulties in credit markets, the Bank of England has seen fit to cut interest rates once again this morning.

This puts the U.K. about three months behind the U.S. in the interest rate cycle.

As for the U.K. housing market, who knows where price will go from here - everyone seems to be quite worried about it though, at least according to this report in The Economist.

On Wednesday a survey of the big services sector reported an unexpectedly sharp slowdown in business activity, which weakened in November to its lowest level since May 2003. Arguably, the CIPS survey highlighted the central bank’s dilemma, since it also showed a pick-up in price pressures. But it came on the same day that the housing market became enveloped in yet more gloom. House prices fell by 1.1% in November, according to the Halifax index compiled by HBOS, a bank. It was the third month running that prices had slipped.

The resilience of household spending over the past year despite slower growth in real disposable incomes has had much to do with the housing market. Rising house prices have emboldened consumers to save much less than usual. The saving ratio has slipped to 3.1% of disposable income, at the latest count. The underlying position is even worse. Strip out the impact of more employer contributions to pension schemes and the saving ratio turned negative this year—ie, people spent more than they earned.

The danger is that a downturn in the housing market will prompt a snap-back in the saving ratio as consumers become thriftier and spend less. The sharper the downturn, the more spending will slacken. In 2005, when house prices stalled for a few months, consumption growth slowed to 1.5% and the economy grew by only 1.8%. If house prices fall next year, the damage is likely to be greater.

This week’s decision by the Bank of England will do something to restore confidence. But next year looks increasingly likely to see a serious setback to growth.

As note here a number of time before, the U.K. is very much like the U.S. - a huge housing boom, a massive trade deficit, a very large budget deficit, and a very low saving rate.

They are still very much like America - now they're just three months behind instead of nine months ahead.