Ground Floor: Sentiment has turned resoundingly negative in the housing market - in the US at any rate, where new home building is at a three-year low. Many economists are concerned that with 1.75 million housing starts last month - the lowest since April 2003 - that economic growth will slow and unemployment will rise.
The slowdown in construction comes following interest rate hikes in the US which began in June 2004 and have seen mortgage rates rise from 3.36 per cent to 5.83 per cent. The National Association of Home Builders' index of sentiment is now at its lowest level in 15 years. Meanwhile, construction firms specialising in home building have seen profits fall along with sales.
To allay fears about potential negative consequences, US treasury secretary Henry Paulson told G7 finance ministers that they didn't have to worry about a housing downturn precipitating a collapse in the economy and that growth was now moving into ranges which were in line with long-term objectives.
According to Paulson, the housing market has been romping along at unsustainable levels and so everyone should be happy that it has finally run into a wall. Yes and no, of course, because the IMF has expressed concerns that a slowing US housing market is a key risk to global expansion. Growth in the US generally has slowed down - to an annual rate of 2.9 per cent in the second quarter following a 5.6 per cent growth level in the first. However, Paulson is confident that it will pick up again and that corporate profitability as well as business spending and higher wages will all offset the downward drag of those falling housing prices.
On a more positive note for worriers, most of the realtors in the US are saying that prices are still higher than they were last year, even though it's taking people longer to sell their houses. They blame negative sentiment on the media, which has written articles about housing crashes and popping bubbles and which seems to delight in talking about householders who are unable to sell the pile that they stretched themselves so much to buy.
It sounds eerily familiar. Over the last few weeks, there has been an increase in stories about the Irish property market crashing, too. On Sunday morning, I ate breakfast while reading that sellers were due for a "rude awakening". As always, there's a conflict between a crash and a soft landing. One is clearly a disaster, the other means that your house might sell for around the same price as the one next door when you put it up for sale in a month's time instead of having gone up another couple of percentage points in 30 days.
According to Sherry FitzGerald, house prices in Dublin rose by 21.2 per cent in the first half of the year - unsustainable by any stretch of the imagination. If the summer months were quieter, then that's not necessarily a bad thing. This means that there are more houses available for the autumn selling season, thus smoothing the graph of supply and demand which has been so skewed in the direction of demand for so long. Supply and demand has been the biggest factor in house price increases.
There are more people chasing houses than ever before. Property still seems like a good bet to most of them. Employment is strong. Salaries are holding up well. There are still reasons for prices to stay at current levels.
Nevertheless, there are some indicators that might bear thinking about. The European Central Bank's (ECB) lending rate has gone up 33 per cent since June 2003. If rates increase another 50 basis points in the next six months, that will mean a 50 per cent increase in the amount of interest a buyer had to fork out every month over the last three years.
That's a significant amount that eats into a houseowner's discretionary income, and if people have less money to spend on things like high-definition TVs because they're shelling out a good deal more on their mortgages, economic activity will slow.
And that's more of a worry for the economy. So much of the current expansion has been based on the foundation of the construction industry that if it begins to falter, the knock-on effects could be sharp and painful to a lot more of us than those directly involved. The leisure industry, the retail industry, the motor industry will all feel the brunt of less money in our pockets for spending on anything other than the mortgage. We will be looking at the same situation as the US - and that has the G7 so worried that Paulson felt the need to reassure them.
Ireland may be different. But it can't defy market logic forever! So if the market slows, then we will have to look to investors to hold things up. But surely they'll think about rental yields of 1.5-2.5 per cent and consider that, without capital appreciation, it's not worth the effort. The thing is that nobody has thought like that in the last few years.
It's cheaper to rent than to buy right now, but renting means that you're giving up potential capital appreciation. It's only when you don't think that there will be any capital appreciation that you suddenly wonder why on earth you're spending more money than you need to every month for somewhere to live. Most buy-to-let investors now admit that the rent doesn't cover the cost of the mortgage and yet they're still buying because past history has shown that waiting was a mistake.
Past performance isn't a guide to future performance, but everyone still wants it to be. Investors in property more than anybody else.
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