Prices are starting to fall. Mortgage arrears are starting to climb. Developers are going bust, and others are stopping work on homes they can no longer sell.
When the latest house price data for the UK are released this week, everyone will be looking for signs that the market is starting to collapse. But there is a market we should be worrying about far more – the American one.
There are plenty of signs of a severe downturn in US property, with home sales down for 12 straight months in a row, the weakest set of numbers for more than a decade. Anyone who thinks that is purely an American matter is kidding themselves.
If the US market crashes, it will tip the economy into recession, and that will ripple out across the world. If there are losses on mortgages, it will threaten the stability of the financial markets. It will determine what the Federal Reserve will do with interest rates, affecting every country’s economy. In 2008, the collapse of the subprime mortgage market triggered a global financial crisis. It has happened before, and it can happen again.
With interest rates quadrupling over the last year, the British property market is not exactly looking healthy. Rightmove reported last week that home prices have stalled, with the weakest figures since the online agency started compiling figures. The Royal Institution of Chartered Surveyors reported that the market was at its weakest since 2009. Even so, it is hardly a catastrophe, at least not yet. Prices are stable, and not yet falling, or at least not very significantly.
It is a very different picture on the other side of the Atlantic. In many major cities, prices are now falling in absolute terms. In San Francisco, where many of the tech lay-offs are concentrated, they are down by 7pc this year. In Oakland, they are down by 4.5pc, and in New York by 1pc.
Meanwhile, with the Federal Reserve continuing to push up interest rates aggressively, and with inflation stubbornly refusing to come under control, the outlook is increasingly bleak. True, figures released on Friday showed new home sales picking up in January, but measured on an annualised basis they are still down by almost a quarter year-on-year. It is not a crash yet, but it is very close to one.
What happens to house prices will make the difference between whether there is a hard or a soft landing. The Fed is trying to engineer by far the hardest trick in the central banking playbook; slowing the economy down, and bringing inflation back under control, but without triggering a full scale recession.
It sounds straightforward enough, but it is very hard to achieve in practice. What happens to the housing market will prove the key to whether it succeeds or fails. If the property market stabilises, but remains broadly flat for a year, then consumer demand will only weaken slightly, and we can expect nothing worse than a mild slowdown.
If prices crater, it will be a different story, with demand collapsing, and a full-scale downturn all but inevitable. And if the US goes into recession, so will the rest of the global economy – because America is about the only thing that is holding it up.
Next, a housing crash will ripple out into the financial markets. There is $18 trillion (£15 trillion) of outstanding mortgage debt in the US market, compared with $14 trillion in 2007 at the peak of the last boom. The rules on mortgages mean it is a lot easier to simply walk away from your debts than it is in the UK. You lose your house, and your credit score takes a beating, but if your property drops significantly in value it can still be an attractive option.
Even worse, and despite increased regulation, mortgages are still packaged up and sold around the world. In reality, the solvency of the American financial system remains critically dependent on the health of the housing market. If it starts to crash, it could easily take down banks, hedge funds and fund managers as well – and that will hit the rest of the global economy very hard.
Finally, it will determine monetary policy, not to mention the likely outcome of the next presidential election. The Federal Reserve is expected to raise interest rates by another percentage point at most, and then gently start easing again. But if house prices crash, all bets are off.
Does Jerome Powell, the Fed chair, believe it is his job to rescue the market, or will he make controlling inflation the priority? Or will he immediately reverse course, and dramatically cut interest rates to salvage the market, fearful of repeating the mistakes of 2007 and 2008?
And even if he did, can a property collapse be turned around once it has started, or will it turn into full-scale panic? No one has the faintest idea, including, in all likelihood, the Fed itself. But one thing is certain. It will be very messy.
The stock market is betting it will be a perfectly executed soft landing, but it is touch and go. It was the US housing market that started the 2008 financial crash, with subprime mortgages turning sour, triggering banking collapses in every major economy.
We are all keeping a watchful eye on house prices in the UK – but right now it is a wobbling American market that is the biggest threat to the global economy.
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