Yesterday's stock market events should sound familiar, writes Marc Coleman, Economics Editor

For the second week in succession, stock markets around the world have encountered significant falls in the value of shares.

The first such occurrence reflected healthy worries about dubious lending activity between Chinese banks and speculators on the Shanghai stock exchange. Once exposed and remedied, the worries dissipated and markets returned to normal.

This time we may not be so lucky. The causes behind yesterday's falls are characterised by fears that asset values have departed from "fundamentals".

Fundamentals come in two varieties.

The financial kind refer to the supply and demand conditions for shares, for bonds and currencies, and how these affect stock prices, interest rates and exchange rates.

When financial asset prices depart from fundamentals, due to malpractice or over-exuberance, correction is rapid.

For example, when the practice of borrowing in Japanese yen to fund speculation in the Chinese stock market drove prices above fundamentals, the mere suspicion of a clampdown caused a rapid correction of share prices on the Shanghai stock market.

In contrast to last week's falls, yesterday's - the Nikkei by 2.9 per cent and Ireland's Iseq index fell by 4 per cent - were more a reflection of concern about the "real" economy.

"Sub-prime mortgage lending" refers to something similar to that which was happening in China; increasingly generous lending to those acquiring assets. However in this case the assets were real: housing, to be specific.

Unlike financial asset prices, real asset prices depart from fundamentals over a longer period time and their correction can have wider implications.

When financial markets correct, a few rich players get burned.

When housing markets correct, consumption, employment, exports and consumer confidence take a more direct hit.

The origins of yesterday's stock market events should have a familiar ring to them.

In recent years, some of the more adventurous US banks lent money to house buyers who had weak credit histories but who were desperate to buy in a market where house prices were skyrocketing.

The phenomenon of 100 per cent mortgages, or "no money down" mortgages as they are called in the US, became more prevalent.

Many property buyers now find themselves financially overstretched.

On Tuesday the US Mortgage Bankers Association said that the rate of late payments and defaults on home loans had reached almost 5 per cent.

This seems to be a low figure, but the fact remains that it is a record high.

It also comes at a time of heightening fears that the US economy is over-reliant on the property market.

Remarks made by the former chairman of the Federal Reserve, Alan Greenspan, to the effect that the US housing market may cause its economy to enter recession have frayed nerves on Wall Street and fears are now growing that problems in this sub-prime market will hurt confidence in the economy generally.

This is because employment levels are influenced by consumption levels, which in turn are related to borrowing levels that many now fear are dependent on overvalued house prices.

And as it is true in the United States, so it is likely to be true here.

That yesterday's fall in the Iseq index probably reflects that fact that, following a prolonged construction boom, share prices are even more exposed to the property market in Ireland than in the US.