Talking of house prices, the Halifax released its latest monthly report on the market yesterday, and this time it had prices down by 1.7 per cent in July. It was another massive drop, but Halifax did its best to soften the blow. “This was smaller than the falls in both the previous two months – May (-2.5 per cent) and June (-1.9 per cent),” it said.
Meanwhile, evidence emerged yesterday to suggest the US housing market crash really is nearing its end.
But, as the US nears bottom, and the UK still seems a long way from the end of the descent, it is worth considering a very important difference between the US and UK housing markets – which could spell a quite different effect on the economy of each country in the years ahead.
The latest round in the story of the UK housing market is now complete. The big three are all in broad agreement too. In fact the Nationwide and Halifax were, just for once, in precise agreement; they both had prices down by 1.7 per cent. Hometrack had prices down by 1.2 per cent, but actually, Hometrack normally reports much more modest changes than the other two.
At a pinch the Halifax and Nationwide can put some kind of positive gloss on their figures, in as much that both reported much bigger drops two months ago. Hometrack, on the other hand, recorded its highest monthly fall ever in July.
The Halifax says that annual house prices are now down by 8.8 per cent on a year ago, but actually that is misleading. When it calculates annual figures, the Halifax compares the quarter just gone with the same quarter a year ago. If instead you just compare July 2008 with July 2007, then actually prices are down by 10.9 per cent. The Halifax index peaked in August last year, and from that point, they are now down by over 11 per cent.
This is significant because just a couple of months ago, the Halifax predicted house prices would fall by ten per cent this year. So here we are in July, and this prediction has already been proven wrong.
The news from the US, however, was more promising.
The index of pending home sales reported by the National Association of Realtors (NAR) saw a big jump in June. Prices were up 5.3 per cent against an expectation of a fall of 1 per cent. Even more encouraging, the slump in sales seems to be near its end.
The big problem with the US is that there is a massive inventory of unsold property. Only when this is cleared is it likely that the decline in prices will halt altogether. But, at least, the trend is in the right direction.
It is quite interesting to note a very significant difference between the US and UK mortgage market, that could have ramifications in the years ahead.
You may recall, in the early 1990s a lot of people with negative equity wrongly believed they could just hand their house keys back to the bank, and then forget about the debt. It wasn’t like that, of course. Once the bank had sold the property, it would then expect the former owners to pay the difference between the mortgage, and the amount the property was sold for. This had the effect of prolonging the length of the recession of that period. Indeed, there are accounts of individuals who were forced into bankruptcy years after they gave their home up.
In the US, at least in parts of the US, it is different. There, the onus of responsibility is with the bank. So if the property carries negative equity, then the lender has to fund the difference.
This partly explains why losses amongst the US banks have been so high. But in a way, this is a good thing. At least the US banks are able to get the bad news out of the way as quickly as possible. The faster they can write-off the debts, the quicker the economy can get moving again. Also, as a result of this system, it seems that many US consumers will come out of their own particular debt crisis quite rapidly.
In the UK, on the other hand, the effect of negative equity is likely to be a much longer-lasting cost.
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