Britain's housing bust is bringing down the economy

(IHT) -- LEEDS, England: Down the road from the train station here is a gaping hole. At the height of the property boom, a developer started to build what was to become one of the tallest and most stylish apartment blocks, designed by Philippe Starck.

But construction stopped abruptly last month when financing dried up because of the credit crunch. Now the abandoned site stands as a stark symbol of the collapse of Britain's building boom and how the credit market turmoil in the United States has seeped across the Atlantic. It also suggests what lies ahead for a few other European economies where property booms gave now debt-ridden consumers a false sense of wealth and security.

In recent weeks, Britons have come to an uncomfortable realization: After 17 years of uninterrupted growth, their economy is moving closer to recession and may well already be in one. Home prices are dropping, sapping consumer confidence, and even though repossessions, bankruptcies and unemployment are still at relative lows, they have started to creep up during the last three months.

Just Thursday, figures released by HBOS, the largest mortgage lender in Britain, showed the housing market slump was gathering pace. The average price of a property fell 8.8 percent in the 12 months through July, the biggest drop since the company started to track prices in 1983.

But the Bank of England is caught in a bind. It is unable to lower interest rates to keep the economy growing because, at the same time, inflation looms. It left lending rates unchanged at its meeting on Thursday.

As a result, many economists are predicting that the situation will sharply deteriorate over the next six months, leaving Britain to face a longer, more painful downturn than the United States.

"The U.S. has seen problems come through earlier and there was more action to lower interest rates than in the U.K., meaning the U.K. will be somewhat slower to recover," said Ian Harnett, managing director at Absolute Strategy Research in London.

Voters are blaming Prime Minister Gordon Brown for the economy's ills, giving his Labour Party its worst popularity rating since the early 1980s.

Britain's economy is in worse shape than most in Europe, with the exception of Spain and Ireland, because of its heavy reliance on two industries that currently struggle the most: housing and financial services.

At the height of the housing boom British banks were trying to outdo one another in their willingness to lend while rivals on the Continent were generally more constrained by regulation.

Leeds is among the cities hardest hit. Situated in the middle of the country, near Manchester and Liverpool, with a population of almost 450,000, it boomed in the late 1990s when technology and service companies set up shop here to profit from cheaper rents and proximity to a major university.

Demand for offices and apartments gave way to a construction boom that made Leeds Britain's fastest growing city in 2003 and christened the region the "Golden Triangle."

Now, many of Leeds's office buildings stand empty and their once trendy glass facades are cluttered with "For Sale" signs.

New developments, like the Lumiere project next to the train station, are being canceled as banks withdraw their financing. Another development, the "Kissing Towers," which would have provided 300 new apartments, was shelved last month.

North of the city center the picture is even bleaker. Overflowing garbage containers stand in front of boarded-up houses, and the city's charities are bracing for a busy autumn and winter.

Gordon Bell, chief executive of the Consumer Credit Counseling Service in Leeds, said calls to his team were already up 20 percent in the past three months and would likely rise further since personal bankruptcies were expected to increase next quarter.

Shahz Khuram, a 33-year-old taxi driver is increasingly nervous about his $160,000 mortgage on his two-bedroom apartment. The fixed-rate period ends next year and he will have to refinance.

"It's not only the mortgage rates that have gone up," he said. "Everything is more expensive. I have friends who are selling their cars to pay their mortgage."

He added, "I'm really working hard now to save some money but it's hard especially with the higher petrol prices."

The average interest payment for a mortgage in Britain rose to 5.8 percent from 5.6 percent in the 12 months through May. That seems low, but home prices dropped 4.4 percent in the same period, according to mortgage lender Nationwide

Repossessions are creeping up, and even property prices in London have started to fall, with values of homes in the most expensive neighborhoods, including Knightsbridge, down by 1.6 percent in July.

Property prices remain about 10 percent higher than three years ago but Standard & Poor's warned last month that prices could fall an additional 17 percent before the end of next year. That would leave about 1.7 million homeowners under water, holding mortgages exceeding the value of their properties.