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Housing market recovery: how does the UK compare to the US?

News

Published: 5 May 2011 | Author: Bernard Clarke

House prices in the USA fell for the eighth month in a row, according to data from the latest Case-Shiller index published in April. After recovering briefly from a low point two years ago, the US 20-city composite index has now returned to within a whisker of the value recorded in the housing market trough of April 2009.

In December 2008, the Case-Shiller index reported the largest fall in its history and, from then and into 2009, US house prices were falling at an annual rate of almost 20%. Since that low point, the rate of annual decline in prices has slowed and, briefly, the 20-city index showed year-on-year price increases, peaking at over 5% in 2010. But year-on-year comparisons are now back in negative territory, with average house prices in the 20 cities surveyed 3.3% lower in April than they were 12 months earlier.

So, how do housing market conditions in the US compare with the UK? The short answer is that, although the UK market has stabilised at low levels of activity, conditions in the US remain considerably worse – by any measure.

According to David Blitzer, chairman of the index committee at Standard & Poor’s Indices (publishers of the Case-Shiller index), US house prices are "within a hair’s breadth of a double dip."

Mr Blitzer commented: "There is very little, if any, good news about housing (in the US). Prices continue to weaken, trends in sales and construction are disappointing…existing home sales and housing starts rose in March, but remain close to recent lows. Foreclosure activity showed decreases in mortgage delinquencies in the fourth quarter of 2010, but are still close to historic highs."

While conditions in the US housing market generally remain very difficult, experience varies markedly across the country. In cities worst affected by falling house prices – in such diverse locations as Atlanta, Las Vegas, Cleveland and Detroit – property values are now lower than in 2000. But other cities have seen strong price rises over the same period. In Washington DC, prices are 80% higher than in 2000, and Los Angeles, New York and San Diego have all seen rises of more than 50% over the same period.

House prices in the UK

The best known house price indices in the UK, published by Halifax and Nationwide Building Society, have both shown strong growth since 2000. As in the US, each also recorded a period of year-on-year house price falls in the aftermath of the financial crisis. In the UK, this period lasted for a little over 12 months, from the summer of 2008 onwards.

Unlike the US, however, the UK indices then showed a marked recovery in house prices from the autumn of 2009 onwards. Each peaked again in April 2010, when the Nationwide index showed year-on-year house price growth running at 10.5%, while Halifax recorded an annual rise of 8.7%. Since then, annual price growth has slowed again and is now broadly flat, according to the Nationwide index. Halifax recorded an annual decline in prices of 2.9% in March, and is predicting a fall of 2% for 2011 as a whole.

Although house prices have grown much more strongly in London than in the rest of the UK since the onset of the financial crisis – and price growth in southern England over a longer period has sometimes led commentators to refer to a "north-south divide" – regional differences in housing markets have generally been much less pronounced in the UK than in the US.

While in small pockets of the UK, it is possible that some types of property may have a lower value than in 2000 – perhaps as a result of localised dilapidation or planning blight – this phenomenon does not affect entire cities in the way the Case-Shiller index shows in the US. 

Partly as a result of the sharp decline in house prices in some US cities, the Case-Shiller index covering 20 different locations records a rise of only 39% since 2000. In contrast, UK house prices over the same period have risen by 95%, according to the Halifax index, and by 120%, according to Nationwide.

Repossessions in the UK and US

One of the biggest headlines in the US earlier this year highlighted the grim statistic of one million mortgage foreclosures in 2010 – the highest annual figure ever recorded. The picture was only slightly better in 2009, when there were 918,000 foreclosures, according to the property data firm RealtyTrac.

Foreclosures have grown very rapidly in the US in recent years, much more quickly than mortgage possessions in the UK. According to the California-based company Irvine, there were just over 100,000 foreclosures in the US in 2005.

By contrast, 33,600 properties were taken into possession in the UK last year, a significant reduction in the 2009 total of 47,900. (We are, however, predicting an increase to 40,000 cases of possession this year, against the backdrop of a weak economic recovery and increasing pressure on household finances.)

Unlike the US, however, possessions in the UK are running at much lower levels than in the last market downturn. In 1991, 75,500 homes were taken into possession – more than twice last year’s total. In the current cycle, a combination of historically low interest rates, lender forbearance, government support and borrower commitment to working through a period of temporary arrears has helped keep mortgage arrears and possessions in check.

Market imbalances

The suddenness and severity of the US housing market downturn helped produce a huge overhang of unsold property, which, in turn, forced house prices even lower and increased the number of borrowers in negative equity. By January 2008, the stock of unsold new homes was almost 10 times the volume of sales in the preceding month, the highest value of this ratio since 1981. On top of this, another four million existing homes were up for sale, of which almost 2.9 million were vacant.

In the UK, builders have been quick to adjust construction rates to an anticipated fall in demand from buyers. Lower levels of possession have also kept in check the number of properties on lenders’ books that make their way back on to the market. So, while there has been an overhang of unsold properties in the UK, it has been on a much smaller scale than in the US.

Last year, Land Registry data showed there were almost 650,000 housing transactions in England and Wales, a modest recovery from the preceding two years, in each of which the total was fewer than 620,000. However, that means that, in each of the last three years, transactions have been around half the normal total, suggesting a significant increase in pent-up demand among would-be owner-occupiers. We have estimated, for example, that 800,000 would-be first-time buyers have been excluded from the market by affordability constraints since 2007.

Housing construction

The number of private housing starts in the US has been running at its lowest level for 50 years. In 2010, the number of starts recovered to 587,000 from a low point of 554,000 in the preceding year. But, in both years, the number of starts was less than one-third of the average of 1.7 million over the preceding 15 years.

In the UK, the number of housing starts (private and public) has also declined in the last two years, but not as precipitously as in the US. Data from the Department for Communities and Local Government shows that housing starts in England totalled 103,000 last year, up from a low point of 78,000 in 2009, compared with an average of around 156,000 over the preceding 15 years. So, housing starts are now back to around two-thirds of the total preceding the market downturn.

Conclusion

By any measure, the UK housing market remains weak and will only see recovery over an extended period. And, as the Home Builders Federation has argued, the shortage of mortgage funding is a major constraint on market recovery. But it is also hampered by the weakness of economic recovery, increasing pressures on household finances and low levels of consumer confidence.  

However, all comparable measures show that conditions remain much worse in the US. As The Economist recently concluded, "the varying fortunes of Britain and America reflect the peculiarities of each market." It observed that there had been fewer forced sales in the UK, and that unemployment in this country had also risen less sharply than in the US. 

It also highlighted that in many US states mortgages are "non-recourse," meaning that when a borrower falls into arrears, the lender can take possession of the property but has no other rights over the borrower’s assets or income. This has encouraged a significant number of US borrowers in negative equity to walk away from their debt, with homes taken over by lenders adding to the glut of unsold property. Another key difference between the two markets has been the much higher volume of sub-prime borrowers in the US who have been unable to keep up with mortgage payments.

Finally, UK borrowers have benefited to a much greater extent than their US counterparts from lower interest rates. Nearly 70% of UK borrowers have a mortgage with a variable rate, and are likely to have seen their borrowing costs fall in recent years. By contrast, many more borrowers in the US have long-term fixed-rate mortgages.