Property Bouncing Back – Slowly
August 19th, 2009
Housing formed the epicentre of the global financial crisis. It was a fall in residential prices that shook and cracked the banking system. News that housing markets are starting to level out is cheering.
It would, however, be naive to assume that the housing market is now on firm and steady ground. There are perils ahead.
In the UK and the US, a range of data suggests that the housing market has stopped its precipitate decline. For example, in Britain, the FT house price index rose by 0.1 per cent in July – the third consecutive month of stable prices. In the US, the seasonally adjusted Case-Shiller composite index for May shows prices are levelling out.
An end to the collapse in the housing market would have positive effects. Banks – and the states that guarantee them and their assets – will be pleased: flat house prices mean fewer borrowers drifting into negative equity, so reducing defaults and limiting lenders’ losses. Meanwhile, shoppers’ confidence may be boosted by the thought that their abodes are not shedding thousands in value as they sleep in them.
But stability should not be taken for granted. First, the data are thin. A few observations from markets with low volumes should be treated with handfuls of salt. The data are not even showing a clear pattern: some of the most frothy, bubble-riven US housing markets are still falling fast.
Second, houses cannot be described as cheap. In the UK, the ratio of incomes to house prices is still beached at a level that had never been reached before the recent boom. In the US, current prices still look high, especially given the overhang of houses awaiting a sale. This is especially true of the Spanish property market.
Third, the financial crisis is still acting as a brake on new mortgage lending, and is restricting potential house-buyers. If banks suffer fresh damage to their balance sheets, they may decide to tighten their lending conditions further, cutting off other would-be buyers from their dream homes.
Fourth, and most importantly, housing market performance will, above all, be determined by unemployment. It emerged on Friday that US job losses rose by less than expected in the last month, but the number of people in work will continue to fall for months to come.
Indeed, investors do not expect house prices to make a sustained rise for a while yet. Futures markets imply a bottom in the US in the summer of 2010, a few per cent lower than the current level.
This is not the start of a great bounce-back, but it is still good news that declines have slowed down so much. This will reduce uncertainty about the danger posed to banks by their mortgage books. In a crisis of uncertainty, where confidence remains fragile, a little knowledge can be an extremely valuable asset.
Story from Financial Times
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