| S&P predicts UK housing correction |
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| Wednesday, 02 April 2008 | |
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The UK housing market is due a major and likely painful adjustment, says Standard & Poor's.
The report is titled European Economic Forecast: Major corrections on the cards as housing markets turn down. Jean-Michel Six, Standard & Poor's chief economist for Europe, said that Europe's housing markets are overwhelmingly turning down and believed that the corrections could be severe and painful in those countries where the housing bubbles have been expanding for longer. "Particularly at risk are the UK housing market, where the financial crisis is exacerbating issues of affordability and general economic gloom, and the Spanish housing market, which is coming to terms with a largess of new homes," Six added. Affordability shocks Affordability has been declining constantly in the UK since 2001, with house prices averaging 3.4x incomes in the fourth quarter of 2007 against 2.4x at the same point in 2000. In turn, the rapid rise in prices has led borrowers to borrow more and over a longer period of time, pushing interest payments to 20.6 per cent of incomes - the level they reached in late 1988 when the previous housing crisis began. Unlike interest rate shocks (such as in 1988-1991), affordability shocks cannot be reversed easily unless prices experience a severe correction. A simple calculation suggests that for the affordability ratio to return to its long-term average (early 1980s-late 1990s) of 2.5x, assuming incomes remain constant, prices would have to drop 27 per cent. Ironically, a correction of this magnitude is close to the peak-to-trough fall in house prices expected in the US. The combination of a sharp deterioration in affordability, scarce funding, and the economic slowdown are about to cause a major slowdown in the UK real estate market. Years of double-digit growth Standard & Poor’s central forecast assumes house prices to be flat or slightly negative on average in 2008, with a modest increase of 4 per cent in 2009. This comes after years of double-digit growth. In August 2005, Standard & Poor’s warned that a red-hot Spanish housing market was growing at an unsustainable pace. The market intelligence firm also cautioned that a slowdown was desirable in order to avoid a major collapse later on. That slowdown did not materialise in the following 18 months, but data released by the INE, the Spanish statistical office, on March 26, 2008, strongly suggest that the market has now taken a dramatic turn. In the 12 months to January, completed house sales were down a staggering 27 per cent on the previous 12 months. Sales of second-hand dwellings, representing 52 per cent of total sales, fell 36 per cent over the same period, while sales of new houses were down 15 per cent. Permits for residential housing seem to suddenly be acknowledging the shift in market trends, falling 40.6 per cent in the 12 months to September 2007 (latest data available). Judging by the experience of the US market, this sudden and brisk drop in permits in Spain, if confirmed in the next few months, would call for a major collapse in housing starts. Major cutback in housing investment The dip in permits is particularly worrisome given that the Spanish economy is heavily dependent on growth in its construction sector. One in five jobs created since 2000 in Spain is in construction. Six said that housing investment amounted to 10 per cent of GDP last year. Before the current housing crash, the equivalent figure in the US was 6.5 per cent. It therefore seems likely that housing investment will experience a major cutback in the next 12 to 18 months. A decline of 20 per cent would simply bring it back in line with overall demographic trends. Experience suggests that after a prolonged boom, however, the pendulum can swing way over to the other side, presaging a larger fall. “We expect house price inflation to turn negative this year and in 2009, in a 0 per cent to negative 5 per cent range each year,” Six warned. Low level of indebtedness By contrast, he held a rather benign view on the outlook for the French housing market over the medium term. This is because there is a relatively low level of indebtedness in French households, at 47 per cent of GDP in the third quarter of 2007, compared with 59 per cent in the Eurozone, and 97 per cent in the UK). In addition, the French economy will continue to enjoy mild and steady growth this year and next, while the new fiscal incentives adopted in 2008 will provide some specific help to the housing market. Even so, the French real estate market is unlikely to return to the heady rates of growth seen earlier this decade. Related articles
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