Like it or not, Britain has become a hot topic of conversation on the other side of the Atlantic. And if you have any contact with the US, you’ll know that the business and money pages of the papers are also looking in this direction. For the British housing market has, believe it or not, become a burning issue in the States.
Why all the interest? Are more Americans planning to follow Madonna’s lead and embrace the tweedy lifestyle of the Home Counties?
In fact, the truth is less glamorous. The US market looks increasingly as if it is heading for a crash. The glut of unsold new homes has hit record levels, and, in the latest sign of the desperation of the sellers, estate agents are throwing in a free pool to secure buyers. While prices haven’t yet fallen, a lot of experts think they might.
Americans are taking a keen interest in our own housing market – and that of Australia, while we’re on the subject – because our slowdown has already started. So far, the Bank of England has steered the market clear of a crash, while managing to slow the pace of house-price inflation dramatically – though, as most of you will be aware, we’re certainly not out of the woods yet.
However, according to economists at Lombard Street Research, the BoE’s success, so far, at preventing a crash does not imply the same will be the case in the US. For one thing, the way the US Federal Reserve managed interest rates recently was in marked contrast to the BoE. Arguably, the Fed waited too long before lifting rates, and started doing so only once the housing market appeared to be overheating. The BoE, on the other hand, started raised rates earlier, before house price inflation’s peak in 2004.
Furthermore, the current account deficit in the US is far bigger than in the UK – a clear sign that Americans are having to borrow much more to keep spending than we do over here. So the States would be wrong to assume that just because the UK has avoided a crash, it is destined to do so, too.
On the other hand, if there were a US crash, matters could worsen here. The chain reaction would go something like this: US house prices crash and, as a result, Americans stop spending in their shops. The US economy slows and, with fewer things being sold on the high street, America imports fewer goods from Britain. Some companies here are forced to cut jobs and some homeowners have to sell up. Voilà – a trigger for a possible fall in prices.
There was also an IMF report not so long ago warning that a crash in one housing market could spark another on the other side of the world because – thanks to globalisation – our economies are increasingly reliant on each other.
However, most economists agree that what is of prime importance for property is the domestic market. The prospects for the UK look considerably brighter than they do in the US, although with prices over here still extremely high – often beyond what buyers can afford – Britain is not yet out of the woods. Þedmund.con[email protected]graph. co.uk. Edmund Conway is Economics Editor of The Daily Telegraph.