We’ve been told that the UK housing market is in worse potential shape than its messy US counterpart. And here is the graph to prove it, courtesy of Merrill Lynch.
UK house prices - both in terms of absolute values and relative to income - have risen further in the UK than in the US over the past decade.
But, panic ye not (or not yet). On other measures, the UK has an advantage.
While house building in the US more than doubled between 1990 and 2005, supply in the UK was effectively flat. In fact, in 2001 homebuilding in the UK was the lowest since the second world war and remains below the level required to keep up with demand.
As a result, UK housing stocks have remained tight, say Merrill, while US inventories soared. Sharply rising delinquencies have added to excess US supply, while UK repossessions remain relatively low helped by a smaller proportion of subprime lending, about 6-8 per cent of lending versus 20 per cent. Downwards pressure on house prices therefore looks greater in US house prices than UK.
So far, so relatively good. The trouble is that absolutely the situation remains nasty.
Even with the mitigating factors of tight supply and low-ish arrears, the UK market has slowed from 15 per cent growth to more or less zero.
There are various (imperfect) measures, say Merrill, but they’re pointing in the same direction. UK house prices look set for a fall, likely driven by declining confidence or tighter credit or both.
They’re forecasting a relatively modest fall of 5 per cent in UK house prices in 2008, with an ensuing squeeze on household consumption and investment and economic growth.
