US and UK Housing Bear Market Trends
Housing-Market / UK Housing May 26, 2008 - 08:53 PMBy: Nadeem_Walayat
The housing bear markets continue to bite into economic activity as the US heads for recession this year and the UK during 2009. The US is still showing no signs of a housing bottom having fallen by 3.1% in the first quarter of 2008 according to government statistics, and foreclosures rising to a all time high as borrowers walk away from homes sinking into negative equity. The UK housing bear market has now entered its 9th month following the peak of August 2007, having gone negative on a year on year basis for April 08 data, which was one of the primary reasons for the meltdown in the UK Labour parties vote in the recent string of May elections.
US housing market bottom pickers seem to be ignoring the fundamentals -
- Of the large over hang of supply on the market of more than 4.5 million homes that will persist for many years.
- That the US economy is only now going into a recession that despite the Feds efforts will extend well into 2009 resulting in job losses and more foreclosures.
- The credit crisis has not hit bottom, risk averse lenders are either unable to or unwilling to lend to prospective borrowers under most circumstances.
- That inflation is eroding the consumers ability to service mortgages and those that face negative equity are increasingly walking away from their mortgage obligations.
The US Housing market turned lower in late 2006, the down trend to date is accelerating as the number of unsold properties passes the 4 million mark creating a large over hang of supply. There is no technical or fundamental sign of an imminent bottom. US house prices could easily fall another 15% and then be subjected to many years of consolidation before prices can start to rise higher again. This despite the clear inflationary strategy of devaluing the US dollar as evident by the currency adjusted gap developing between US and UK house prices (green line). The US housing market is clearly in the grips of a vicious cycle of house price falls, leading to more foreclosures leading to further house prices falls. The impact of each turn of the cycle is an greater credit squeeze as leveraged banks losses and risks escalate.
The UK housing market peaked in August 2007 and to date is declining at an annualised rate of 7.5%, which is inline with the two year forecast for a 15% price drop from August 2007 to August 2009. Whilst there are many fundamental reasons for why the UK house prices have been more supported than the US i.e. limited new builds and recent influx of immigration from eastern europe. However the degree to which the UK housing bubble has been inflated gives ample scope for a serious price correction that would extend to a period well beyond the initial 2 year house price forecast period, especially if the recent immigrants flow outward during a UK recession and therefore contributing towards a glut of empty rental properties amongst the sizeable speculative buy to let sector.
Not only have UK house prices risen by 170% since January 1999, against US house prices that currently stand at up 111%. But the currency adjusted increase is 225%, where much of this increase has taken place during the past 2 years. The UK housing market seems destined to give up all of the gains made during 2006 and 2007 and therefore targeting a nominal price decline of at least 19%. Declines beyond these are dependant upon inflation and currency trends which could see a real terms inflation adjusted decline of more than 33% over a 3 year time frame (from August 07).
With US house prices expected to decline by a further 15% this would still make UK house prices more expensive in comparison and therefore could be followed by a severe currency adjustment which implies a sharp drop in the pound against the dollar. Already the British Pound has closely tracked the dollar's decline lower since the summer of 2007, having fallen by 17% against the Euro.
Another major negative for the UK housing market is the impact of the ongoing depression in the financial sector as it comprises a much larger segment of the UK economy than for the US. The UK financial sector helped lift average house prices in London to over £320,000 ($640,000) way beyond average London salary of £42,000 ($86,000), this implies a greater than average fall for London and is backed up by recent statistics which extrapolate towards an annualised fall in house prices of 12%.
Home owners looking forward to further interest rate cuts will be disappointed as both central banks have signaled a halt to rate cuts. The US has called a halt after deep cuts from 5.25% to 2% against the UK which has cut rates from 5.75% to just 5%. The halt in rate cuts is as a consequence of the surge in inflation that is expected to exceed upper boundaries in the coming months.
As the US market is discovering, government attempts to inflate their way out of a nominal house price falls will not work during a time of an emerging markets demand led secular commodities bull market, throw in the consequences of peak oil and you have all of the hall marks of nominal housing market price falls despite rising inflation, as consumers have even less cash available after paying for the rising costs of necessities then to service increasingly expensive mortgages that have reset to higher interest rates by banks with decimated balance sheets as a consequence of the ongoing credit contraction. Thus an economic environment of building stagflation with deflationary forces equals a cycle of continuing house price falls triggering even further deflationary credit contraction amongst risk averse lenders.
Therefore those looking for an early bottom to the US and especially the UK housing bear markets may be greatly disappointed.
More analysis on the US and UK housing markets in this weeks free newsletter.
By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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