Can UK housing market learn lessons from across the Atlantic?

Having a lot recently about what is happening in the UK, I want to look at the other side of the Atlantic as there are very similar scenarios affecting housing in the United States.

Just as in the UK, prices are continuing to rise despite political and economic uncertainty and some of the main reasons are also the same, namely a lack of supply and not enough new homes being built.

Stubbornly low housing supply levels held down existing home sales in the US, according to the latest figures from the National Association of Realtors and this is now affecting sales. Indeed, every major region, apart for the Midwest, saw transactions fall and demand is easily outstripping supply in most of the country. This is stymieing many prospective buyers from finding a home to buy.

The data also shows that the median existing home price for all housing types is 6% higher than April 2016 and has now increased year on year for 62 months in a row. This is having a particular effect in the lower and middle market price range which means it is hitting first-time buyers and second steppers, both groups that are essential for a healthy housing market.

Homes in these prices ranges are currently hard to find in most markets and according to estate agents when one is listed for sale, interest is immediate and multiple offers result in an even higher sale price. Data from real estate firm Clear Capital also shows that price growth is strong, up 6.3% year-on-year in April, led by the West with annual growth of 8%.

Just like in the UK, there are affordability issues. This is not just to do with property prices, but mirrors the situation in Britain where rising rents mean that tenants hoping to buy find it harder to save for a deposit, or a down payment, in the US. Research from property firm Zillow suggests that as rents become more expensive, tenants are starting to look for cheaper housing options outside central areas and the result is rents rising faster in the suburbs. For the first time in four years, suburban rents are rising faster than urban rents.

There are no signs of a let up as a strong employment market is expected to keep prices high, with the national median price expected to rise around 5% this year, with sales currently running at a decade high.

Lawrence Yun, NAR chief economist, believes that a lack of land, labour shortages and tighter lending for construction is impeding the U.S. building industry’s ability to produce more family homes. He said that there is little doubt first-time buyer participation would improve and the home ownership rate would rise if there was simply more inventory. Housing construction has been uneven so far this year, well under the 1.5 million new homes needed to make up for the insufficient building in recent years.

One big difference between the two housing markets is that interest rates are rising in the U.S. Yun believes that the rising interest rate environment is here to stay as the Federal Reserve slowly begins unwinding its balance sheet. He foresees two more short term rate hikes by the end of this year and for mortgage rates to average around 4.3% before gradually climbing towards 5% by the end of 2018.

However, with continual supply shortages fuelling faster price appreciation across the country the interest rate rises do not seem to be having much effect. Several metro areas with the healthiest job gains in recent years continue to see a large upswing in buyer demand but lack the commensurate ramp up in new home construction. This is why many of these areas, in particular several parts of the South and West, are seeing unhealthy price appreciation that far exceeds incomes.

As far as the UK is concerned there are some interesting signs. It has been said that an interest rate rise would dampen the market, but this has not happened in the US. It was said that Brexit would have an effect, but it hasn’t, and that this week’s general election will leave a mark. In both nations more new homes are needed but this is not going to happen overnight and could take a decade to sort out.