Jun 13 2007
Much has been made of the slump in US housing and whether it could be contagious.
Views have swung both ways from the housing problems being purely a local hiccough with a limited chance of a pandemic, to the US getting flu and the UK being the first shivers.
Much attention in the US has been centred on the subprime collapse. After the US Federal Reserve's campaign of interest rate rises to hold back inflation last year, sub prime lenders found high levels of defaulting as borrowers could not keep up with the rate hikes.
However, the subprime falls have been spreading. At the Fed's May meeting to set interest rates, minutes stated: "All told, recent readings on home sales suggested that housing demand had weakened further. House-price appreciation continued to slow, and some measures were again showing declines in home values."
Statistics from the US National Association of Realtors for March reveal a 2.6 per cent fall in existing home sales and average prices fell 0.8 per cent over the year. Furthermore a recent report from the UN's Department of Economic and Social Affairs predicts that US growth will hit 2.1 per cent in 2007 - down from 3.3 per cent in 2006 - with the weakening housing market seen as a primary stumbling block.
Invesco Perpetual USA Market Update highlights the state of the US housing market, describing the weakness of the US economy as continuing "to cause concern".
"The weakness of the US economy continued to cause concern. The preliminary estimate of GDP... is the slowest recorded rate of growth for four years. A sharper-than-expected deterioration in net exports and in government defence spending detracted, but it was estimated that the problems in housing reduced economic growth by a full percentage point on their own," the report states.
"Sales of existing homes recorded the largest monthly decline in 20 years, and new home sales continued to lag construction, adding to already bloated unsold inventories."
Threadneedle chief investment officer Sarah Arkle echoes these concerns in Threadneedle Investment Strategy but admits that the outlook is not all negative for the US economy.
"The US housing market slowdown and concerns over the sub-prime lending market have continued to grab headlines. On the other hand, consumer spending and employment growth remain solid and private sector net wealth is high. On balance, we look for a year of moderate economic growth in the US and lower headline inflation as the cost of housing declines," she writes.
Meanwhile looking forward, Sebastian Mackay, economist on the SWIP Global Bonds and Economics team, describes the current state of the US housing market as a "market correction".
In SWIP Global Economic Prospects Monthly he writes: "We continue to expect the Federal Reserve to cut interest rates twice to 4.75 per cent over the next year in response to sub-trend growth and diminishing inflation concerns.
"Lower interest rates and the end of the housing market correction should allow US growth to recover to trend by the second half of next year."
Mr Mackay also highlights a continuing drag from residential investment - with the housing market downturn seeing an annual fall investment of 17 per cent.
"But despite this contraction, there remains a substantial stock of unsold homes, implying that residential investment will continue to drag on overall growth for several quarters. Although the negative contribution to growth from residential investment is expected to diminish it should still be enough to keep overall growth below trend in the near-term."
Meanwhile, Andrew Milligan - head of global strategy at Standard Life Investments - gives a more profound look at the US property market in Standard Life Investments Global Overview and describes housing as "a central concern".
He writes: "Our view on the US remains more downbeat than the consensus, and we do not believe that all of the bad news is yet priced into financial markets.
"We expect to see renewed weakness in the second quarter, as the housing and manufacturing inventory cycles move down again.
"The housing market remains a central concern; for example new housing starts have fallen from around 2.25 million per year to around 1.5 million per year. This reflects not only a significant fall in housing demand, but also weakness in supply as inventories of new housing stock remain at historically high levels.
"A meaningful recovery in the housing market still seems some quarters away and so the sector will continue to be a drag on overall economic activity, say in terms of employment and housing related spending."
He added a key issue was the sharp deterioration in the sub-prime sector of the US mortgage market, with delinquencies are now running about five per cent of outstanding loans despite historically low levels of unemployment.
"The wider concern is that the problems at the sub-prime end of the mortgage market now begin to filter out to the wider mortgage market, but there is little evidence of contagion at the moment."
However, Mr Milligan added that the problems of the US had to be put into context and most economists raised their growth estimates for most other major developed and emerging economies in 2007
In the UK, since the Bank of England started its round of interest rate rises in August to hold back inflation last year, experts have been warning that the housing market is set to slow - although any talk of crashes has been swiftly dismissed.
After four interest rate rises in nine months the residential market is now eventually starting to slow - although a shortage of homes and teething troubles over Home Information Packs (Hips) have seen price rises continuing - and mortgage data from the Bank of England show mortgage approvals in the UK drooped to a 12-month low in April.
The introduction of Real Estate Investment Trusts (REITs) with a whimper in the UK - despite the tax benefits they offer - also signalled a loss of confidence in property.
A report in the Wall Street Journal claimed the UK commercial property boom could be heading to an end as UK REITs are among the world's worst performers in the world and Francis Salway, chief executive of Land Securities, has admitted that capital growth is now relatively difficult in the property market.
Gerry Ferguson - in SWIP Property Trust Q1/07 Update - sees rental growth driving the market, not capital growth.
He said: "Unlike 2006, we see the property market being driven more by rental growth - either through market movement or our own active movement of the portfolio."
Looking forward he predicts growth coming from the office sector and for the fund itself properties with fixed uplifts are expected to provide solid growth.
He expects commercial property returns on average of six per cent per annum - down from recent years where 18 per cent returns were reported - and as a whole 2007 should see returns of six to eight per cent with rental growth rising by four per cent
In SWIP Property Trust , Mr Ferguson admits "property returns will now be driven more by income than by falling yields".
He adds: "Offices, particularly in Central London, continue to outperform other property sectors. The buoyant financial services outlook, helped by robust equity and related markets, should continue to benefit offices, which we expect to remain the best-performing sector over the next few years."
While the US housing market has got a case of the chills from subprime-related ills, the UK residential market - despite a little chilling - is not expected to head the same way. Overall, both countries face problems over property but separate outbreaks, rather than any contagious disease is seen to be the reason.
