Housing and related markets (especially in the US) produced the ‘bubble’ (inflated and unsustainable property prices) whose bursting (subsequent sharp price declines) heralded the start of the ‘credit crunch’ that erupted in 2007/2008. There were many other factors in the build-up to the crisis, but property markets were central. These markets are also important lead indicators of economic recovery after a downturn.
The Economist (February 25) recently constructed an index of ‘lost economic time’ as a result of the recent (2007-2009) crisis. This index comprises seven indicators of economic health (including property prices). It makes for sobering reflection. Greece comes off worst with its ‘economic clock’ turned back 12 years. The US ‘lost’ 10 and Britain 8 years; eurozone countries like Italy, Ireland, Portugal and Spain lost over 7 years on their ‘economic clock’.
Within this same index, house prices went backwards. For example, using this index the average US homeowner is living in 2001 when measured by inflation-adjusted property values; Britain similarly lost seven years of property prices. But these kind of data (useful and informative though they may be in emphasising the scale and severity of the last crisis) need to be interpreted with care.
We need to ask whether post-crisis we can find any reassurance in more recent data. In particular, are we yet able to conclude that the property price decline has ‘bottomed out’? Are there any signs that a property price and activity upturn are now under way, however modest?
A recent The Economist (4 March) article on the US housing market points out that ‘signs of recovery are everywhere, but lenders are still reluctant’. It was in 2005 that US residential building last contributed positively to growth. Employment has dropped by 43 per cent since that time. But this trend now looks to be reversed.
In recent months, developments have begun to look a lot more positive. The US National Association of Home Builders’ index of builder confidence rose for a fifth consecutive month in February (to its highest level since May 2005). Up to now, this apparent recovery has been led primarily by the rental market (which is unusual in recent US economic experience).
Many experts believe that the US housing market may offer better returns than shares. The Sunday Times (4 March) reported that ‘Warren Buffett, America’s most famous stock market investor, has said that he would buy US residential property over shares, as new figures suggest house prices across the Atlantic have bottomed out’. Although most experts are not predicting an immediate strong recovery, most agree that an upturn (albeit moderate) is now under way.
This apparent good news is part of a growing collection of signals that US economic recovery has begun in earnest. The consensus is that at least a moderate US economic upturn is really happening and may be sustainable. It is still early days, but many are now subscribing to this view.
Although the UK economy is still in a comparatively weak state, the economic signs of recovery are also there and they are being increasingly recognised, The UK property market (as we explained earlier, property market recovery and optimism are key signals in themselves) is also looking more buoyant. Nationwide reported that in late February, average house prices rose by 0.6 per cent in January. Over the year as a whole, they were up 0.9 per cent.
Another good signal for the UK property market is that British builders had their best month in February for almost a year. The closely monitored Market/CIPS construction index jumped to 54.3 (anything over 50 on this index scale signifies growth) in February, from 51.4 in January.
These positive signals from the US and UK housing markets are undeniably good news. They complement other encouraging data from these two economies. There remain dangers and stormy waters ahead, but the return of greater business and political optimism on the developing economic upturn have to be good news.
Since the US is still the ‘economic engine’ of Western recovery, this recent news is doubly encouraging. Just in good time for the run-up to the next US Presidential election…
Professor Ted Gardener