Home economics: the real estate market in the US

Anybody who wants to get gloomy about Britain’s housing market has only to cast an eye across the Atlantic to America

Anybody who wants to get gloomy about Britain’s housing market has only to cast an eye across the Atlantic. The US housing downturn is proving a lengthy one, and shows scant signs of ending.

Last week, figures for new-home sales in America showed a drop of 4.7% in December to an annualised rate of 604,000, the lowest for 13 years. Though monthly figures are volatile, particularly in the weather-affected winter months, the weakness appears to be genuine.

At face value, anybody buying a new home in America can do so at a price 10.4% lower than a year ago. There is a note of caution attached to this – the figures are not adjusted for size and type of property – but nobody doubts prices are still falling. Housebuilders in Britain have had a torrid time on the stock market, but spare a thought for their US counterparts. They are sitting on more than 9½ months’ supply of unsold homes, the most for 26 years.

So, the housing market in America is undoubtedly weak and, for the moment, getting weaker, in spite of aggressive cuts in interest rates by the Federal Reserve, its central bank. There are important differences between the USA and the UK. America, after all, was the home of sub-prime, while the supply of new homes there has been less constrained by planning restrictions.

If you want to be pessimistic, however, you would say that, just as America tends to get new gadgets and Hollywood movie releases before us, so its housing-market pain may be a harbinger of things to come here – in which case, prepare for a long and grinding downturn.

The Bank of England’s figures for mortgage approvals were certainly downbeat: they fell to 73,000 in December, from an already weak 81,000 in November.

A different scenario is provided by the Centre for Economics and Business Research (CEBR), in its latest Consumer and Housing Prospects report. The CEBR has joined those predicting a drop in prices this year. It thinks that by the fourth quarter, the average house price will be £187,900, 2.5% down on the final three months of 2007 and 5.5% below the peak of £198,900 reached last summer. Its forecast is significant in that it has tended to be more upbeat about the market than, for example, Capital Economics. But recent data, including a 0.4% drop in prices recorded by the Land Registry in December, the first such fall since August 2005, have tipped its hand.

Unlike others, however, the CEBR remains bullish about the fundamental state of the housing market. It thinks the downturn, caused as it is by the credit squeeze and temporary strains on household finances, will be short-lived. Prices in 2009 will rise by 3%, it predicts, followed by above-inflation rises in the following two years.

This is the battleground on which housing predictions are being fought out. Will we see a drawn-out US-style decline in market activity and prices, or just a brief period of pain, after which factors such as rising population and a shortage of housing supply will reassert themselves? I am in the latter camp, but for this to happen, sentiment here will have to remain optimistic – unlike in America.

home.economics@sunday-times.co.uk