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America’s property market is collapsing – but Britain will be hit harder

house prices sales mortgages property market
house prices sales mortgages property market

Property sales in America have tanked, affordability is at its worst level since 1985 and house prices have been falling since June.

Mortgage rates have hit a 20-year high of 7pc, far higher than in the UK. The housing downturn across the pond has unfolded much more quickly than in Britain, where transactions are currently stable and price declines are yet to show up in the official index.

But America offers a blueprint for what is about to happen here – and analysts have warned that Britain is in for a much rockier ride.

Capital Economics, a research consultancy, has forecast an 8pc house price fall in America – while a drop of 12pc could be recorded here.

American house prices have fallen first

Property values across America fell by 0.5pc month-on-month in July, and by a further 1pc in August, according to the Case-Shiller index.

Capital Economics expects house prices will start dropping on an annual basis from March next year, and will keep falling for 15 consecutive months. The anticipated 8pc peak-to-trough fall will be the largest since the financial crisis.

Even in Florida, which in the year to June 2022 recorded the highest house price growth of any state in America, demand is cooling. Prices soared by 27pc, driven partly by a huge influx of relocators from California, Chicago and New York – areas with higher taxes and stricter Covid policies.

Now, prices are flat year-on-year. Mick Duchon, of Corcoran real estate agents in Miami Beach, said: “I’m seeing buyers expect more negotiability and sellers are more flexible because they know what’s happening in the market.

America’s housing downturn is ahead of the UK’s, where official data shows month-on-month house prices in September were still level. Nationwide building society’s more timely index, which is based on mortgage approvals, showed that monthly falls began in October.

American house sales are ‘falling off a cliff’

Property transactions in the US have plunged by 32pc between January and October this year. Last month, there were 4.4 million existing home sales, the main measure of purchases, according to the National Association of Realtors, a trade body. That is 2 million fewer than in January and 16pc less than in October 2019.

Bob Schwarz, of Oxford Economics, an analyst, said sales and buyer demand are “falling off a cliff”. “[This is] the longest stretch of consecutive declines since the housing collapse in 2007,” Mr Schwarz said. Transactions will “continue to plummet” in the coming months, he added.

Sam Hall, of Capital Economics, said: “We think 2023 will be the weakest year for existing home sales since 2011.”

American mortgage rates have hit 7pc

The housing downturn in the US began before Britain’s because mortgage rates there have climbed earlier and higher. This was because the Federal Reserve began raising the main Bank Rate earlier than the Bank of England.

In October, average mortgage rates in America hit 7pc. Capital Economics expects that mortgage rates will stay at that level for the last three months of this year, and will not fall below 6pc until October 2023.

The impact on the market is clear. In the week ending November 11, the Mortgage Bankers Association’s index of mortgage applications fell by 46pc year-on-year. This typically feeds into sales in the following month – meaning a further drop in transactions is in the pipeline.

Despite the chaos that followed the mini-Budget, rates in Britain have not hit the highs seen in America. Rates rocketed to peaks of 6.65pc and 6.51pc for two- and five-year fixed-rate deals respectively on October 20, after then-chancellor Kwasi Kwarteng’s statement triggered panic in financial markets. But they have since fallen back: on November 22 the average two-year rate was 6.13pc, according to Moneyfacts, a data company, while the average five-year rate fell below 5.95pc.

Why Britain will be hit harder than America

Even though mortgage rates are lower in Britain, the impact here will be greater.

With rates at 7pc in America, the share of median household income needed to cover monthly repayments on a typical home has just hit 28.5pc, according to Capital Economics. This was more than double the 13.5pc share needed in May 2020.

American homes are the most unaffordable they have been since February 1985.

But separate analysis by DBRS Morningstar, a credit ratings agency, highlighted that repayments on a new mortgage in America today make up a smaller proportion of median household income than in the early 1980s. In Britain, the measure is at its highest level in history since at least 1978.

Rehanna Sameja, of DBRS, said: “House prices in the UK have grown so much more than wages.” Even though mortgage rates here are slightly lower, affordability in Britain is worse historically because home values in recent years have climbed higher in proportion to earnings.

Rate rises in Britain also started from a much lower base, meaning the sudden mortgage shock has been greater than in America. In October 2021, the average five-year fixed-rate mortgage in Britain was at 2.55pc. In America, the average rate was 3.2pc.

The levels of repossessions in America will be lower

American homeowners are much better protected than those in Britain. Here, high mortgage rates reduce affordability for new buyers, but they can also cripple existing homeowners if they are on variable rates or when they come to the end of fixed-rate deals and have to refinance.

In the US, the majority of homeowners have mortgage deals that are fixed for 30 years. In Britain, buyers typically only fix for two or five years. This means far more homeowners will be affected as and when their deals end.

Mr Hall said: “The key difference is that the majority of homeowners in America take out 30-year fixes. That means they won’t be affected by rising mortgage rates like homeowners in the UK. Because so many borrowers have protection, it means we won’t see the same [proportional] scale in foreclosures in America.”

He added: “That is the main reason we are not forecasting more than an 8pc fall. While demand will fall off, supply will remain tight.”

The American economic outlook is also better than Britain’s. High inflation means real personal disposable incomes have also plunged in America – dropping by 12.8pc year-on-year in the first three months of 2022 alone. This fall was significantly larger than the 7.1pc drop in real household disposable incomes forecast in the UK by the OBR over two years.

But the American data looks particularly dramatic because of the base effect from the pandemic support packages – most notably the rounds of stimulus cheques, the last of which was paid a year earlier in March 2021.

While Britain’s drop in disposable incomes will unfold over the next two years, Capital Economics has forecast that in America this will return to growth at the start of 2023, further reducing the pressure on household budgets.

House price falls are likely to be tempered by low supply. In Florida, even though demand has dropped, the pandemic rush could boost the market long-term. Mr Duchon said: "The people who moved here are staying, not leaving, so we have low inventory levels." Florida's low taxes are a key reason to stay put. But in Britain, the hotspots that recorded the biggest booms do not have the same incentives.