Prices are beginning to fall. The mortgage arrears are beginning to rise. Developers are going bankrupt, and other homeowners are ceasing to work on properties they cannot sell.
Everyone will be watching for signs of a market collapse when the UK’s latest house prices data are released. We should be worried about the American market.
There are many signs that the US is experiencing a serious downturn in property sales. The decline in home sales has been evident for 12 consecutive months, making it the lowest number in more than a decade. People who believe that this is an American issue are lying.
If the US market crashes it will cause a global recession that will spread across the globe. Losses on mortgages will also threaten the stability and viability of the financial markets. It will decide what the Federal Reserve will do regarding interest rates. This will have an impact on every country’s economy. The 2008 financial crisis was triggered by the collapse of subprime mortgage markets. It’s happened before and it could happen again.
The British property market has seen interest rates quadruple in the past year. This is the lowest level since Rightmove began compiling data. According to the Royal Institution of Chartered Surveyors, the market is at its weakest level since 2009. It is not a disaster, but it is still a good indicator of things to come. Prices are stable and are not falling yet, or not at all.
On the other side, it is quite different. Prices are falling in many cities. They are down 7 percent in San Francisco, the city where most of the tech layoffs have occurred, and by 7 percent overall. They are down 4.5pc in Oakland and 1pc in New York.
The Federal Reserve continues to raise interest rates aggressively, while inflation stubbornly refuses to be controlled, the outlook for the future is becoming increasingly grim. Although new home sales increased in January, they were still down almost 25% year-on-year when measured on an annualized basis. Although it’s not yet a crash, it is very close.
The impact of house prices on whether the economy is going to recover or not will determine whether it’s a hard landing or a soft one. The Fed’s most difficult trick is to slow down the economy and bring inflation under control without triggering a recession.
Although it sounds simple, it can be very difficult to implement in practice. The key to success or failure of the housing market is what happens to it. If the market stabilizes, but stays flat for at least a year, consumer demand will be slightly lower, and we can only expect a slight slowdown.
It will be different if prices crash. Demand will collapse and a complete downturn is almost certain. And if the US enters recession, so will all of the global economies . America is the only thing holding it up.
A housing crash could cause financial market turmoil. The US mortgage market has $18 trillion (PS15 Trillion) of outstanding debt, compared to $14 trillion in 2007, at the height of the last boom. It is much easier in the US to just pay off your mortgage debts, than it is in the UK. Your house is lost and your credit score suffers. However, if your property’s value drops, it may still be an attractive option.
Even worse, despite increasing regulation, mortgages continue to be packaged up and sold all over the globe. The health of the housing market is crucial to the financial system’s solvency. It could also easily bring down hedge funds, banks and fund managers – which would have a devastating impact on the rest of the world economy.
It will also determine monetary policy and the outcome of the next presidential elections. The Federal Reserve will likely raise interest rates by a maximum of 1% and then ease off again. However, if house prices plummet, all bets are off.
Jerome Powell, Fed chair, believes it is his duty to save the market or will he prioritize controlling inflation? Or will he reverse course and drastically reduce interest rates to save the market, afraid of making the same mistakes as 2007 and 2008.
Even if he did, will a property crash be reversed once it is started? Or will panic set in? Nobody knows the answer, even the Fed. One thing is certain. It will be messy.
The stock market bets it will be a flawlessly executed soft landing. But it is not touch and go. The 2008 financial crash was caused by the US housing market. Subprime mortgages turned sour and triggered banking collapses across all major economies.
All of us are keeping an eye on the UK’s house prices, but it is the wobbling American market that poses the greatest threat to the global economic system.