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Forecasts for a double-dip recession in Britain are still rare, though a few economists might be tempted to take a more pessimistic view of growth after watching the unfolding downturn in the housing market. In London this morning, the Halifax, the country's biggest mortgage lender, reported that housing prices fell in September by the most since 1983, the year it began publishing the widely followed survey.

The Halifax said the average cost of a home in Britain fell 3.6 per cent in August, to pounds £162,096 ($262,000). That takes the year-on-year drop to 0.7 per cent. That's not a disaster, but hardly welcome news in an economy under pressure as financial and civil services jobs disappear and the government implements one of the toughest austerity programs in the European Union.

Earlier housing surveys also showed weakening prices. One produced by the Nationwide Building Society, another big mortgage lender, showed a 1 per cent drop in prices in August.

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The roll-over in housing prices appears to reflect fresh fears about the health of British economy, not the fact that mortgages for first-time buyers are hard to get -- that has been the case since the financial crisis started more than two years ago. The bogey man is the austerity program, whose details are to be announced by David Cameron's coalition government on Oct. 20.

Everyone already knows the spending cutbacks will be brutal. When the Conservatives and Liberal Democrats formed a government in May, they inherited a budget deficit that would make the Greek finance minister weep. Britain's deficit, as a percentage of GDP, was 11.1 per cent last year and is expected to improve 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 -- the government is planning a £113-billion fiscal consolidation over the next five years. Many government departments and ministries face budget cutbacks of 25 per cent or more, meaning job losses could be horrendous.

Unions have warned that 200,000 or more civil servants jobs could disappear, meaning a large portion of the work force will no longer be bidding up house prices. Job losses in other industries can only add to the economic malaise -- all grim news for the housing market.

Will falling prices trigger a double-dip recession in Britain? Economists say it all depends on the severity of the new downturn.

The housing peak came in mid-2007, a year before the credit crunch. Prices then fell about 25 per cent before reversing course. Over the next year, prices rose about 10 per cent. A fall of 3 per cent or 4 per cent from current levels may not, on its own, push Britain in to recession again. But if they fall below their previous lows, all bets are off. The British economy is too fragile to handle an outright housing collapse, one that would push millions of house owners into negative equity.

The Bank of England is not taking any chances. As the new housing price survey was coming out, it announced that it would hold interest rates steady at 0.5 per cent and retain its quantitative easing program to the £200-billion already committed.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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