The effect of the housing market correction in the US has been felt worldwide through the sub prime crisis. Analysts had watched carefully other markets to follow. Whereas Ireland and Spain are two that has been considered to be over inflated, analysts are also watching the UK market. There are many reasons to worry in the UK. First, the UK has been the first market where a mortgage based bank has gone bankrupt and nationalized. The model business followed by Northern Rock might still be present somewhere else in the UK. Second there are many fraud elements in the UK market similar to events surrounding the US sub prime crash. The Financial Services Authority (FSA) has recently banned two mortgage brokers for handling false applications to lenders. Income and credit conditions are have been altered in an attempt to keep the ball rolling. Third, UK house prices have increased more than in US whether this is measured either in absolute values or in relative values, that is, relative to income (see picture below taken from a Merrill Lynch report). Fourth, interest rates are al high levels in the UK and any reductions in interest rates are currently difficult given inflationary pressures. The mortgage bill is likely to remain high for those holding mortgages. Fifth, household debt/income ratios are hitting record levels.
There might be many other arguments not mentioned above that justifies a correction. But I believe these are enough. We have learnt that mortgage crisis can easily have economic effects beyond national borders. This is why the UK housing is an additional worry in our current gloomy horizon.