There is little clarity and even less consensus on the state of the US housing market. A faltering late Summer and early Autumn in which the price of existing homes, accounting for 85 per cent of the US market, fell year-on-year for the first time in 11 years by 1.7 per cent, appear to have given way to a greater degree of confidence in the last couple of weeks. The stabilisation of home builder sentiment in October, combined with falling energy prices and a historically low unemployment figure of 4.4 per cent have supported an optimistic view. To quote GMAC, “The 2006 mortgage and housing market may still wind up among the top five highest volume years in history. Although purchase originations are set to fall circa 6 per cent, they will fall to an impressive $1.41 trillion.”
So what does this mean for us on the other side of that Atlantic? Are we also heading for a downward blip, or do the differences between the markets make the state of the US housing market irrelevant to UK house buyers?
Fundamental differences
There are fundamental differences in the nature of the US housing market and that of the UK. The growth in US house prices has been supported by the regular introduction of creative mortgage products, the likes of which we have yet to see in the UK. Even as the Fed has raised rates, introductory rates of 1 and 2 per cent have been launched (albeit combined with higher long-term rates and punitive early redemption penalties) and mortgages which take up 50-60 per cent of pre tax income are approved.
A second difference is that, unlike the UK, where new developments are hampered by planning restrictions, government policies and NIMBYs (Not In My Back Yards), the US market is much more flexible. The minimal level of constraints of this nature enables the US market to respond much quicker than the UK’s to changes in demand. On the upside, a rise in prices results in a surge of activity in the construction sector. This is best illustrated in figures; over the last 15 years a rise of 131 per cent in US house prices has resulted in 22.8 million new homes being built. In contrast, house prices in the UK have risen 319 per cent, and only 2.8 million new homes have been built.
To some extent this is self fulfilling, a market where demand is able to meet supply will necessarily be subject to less drastic rises. On the downside, it can also result in a great deal of spare capacity being generated – as we see at present – and it is this spare capacity that is simply not shifting. Inventories are at a 13-year high and, at current rates, it would take seven and a half months for these homes to be sold. New home sales forecasts appear strong at 1.06 million, but this is a fall of 17.3 per cent on last year.
The overall impact on prices of the two models are best illustrated by the charts opposite which highlights the ‘smoother’ nature of the US market.
Learning from the US
Given the market differences and the fact that supply in the UK is a long way from catching up with demand should we be looking to the US at all? The answer is yes. The key difference between the markets means that the construction sector in the US is much more influenced by changes in house prices and permissions for single family permits are currently 30 per cent lower than last year. The US construction sector accounts for 6.4 per cent of jobs, contributing to 14 per cent of the increase in employment in 2005. The impact of it flailing will be significant, with many commentators expecting it to knock between 0.5 per cent and 1 per cent off growth. In an economy where confidence is key, the impact of this could damage sentiment and tip the US economy into a much more fragile state.
For us in the UK industry, we should also learn from their product experience. Innovation is to be welcomed, however, sensible lending criteria are essential if we are not to kill the housing market of tomorrow, through our keenness to lend today.
In the last few years, the US economy has been the powerhouse of the global economy, and the UK is particularly vulnerable. It is oft said that if America sneezes the world catches a cold. Let’s hope the recent positive indicators and the optimism of the National Association of Realtors are well founded and that the US economy manages to steer a solid course in the coming months.
