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Why the U.S. Slump Could Be Worse Than the U.K. One

Posted by: Peter Coy on October 6, 2006

Don’t count on the U.S. to escape from a housing downturn as easily as the United Kingdom did, Merrill Lynch economist David Rosenberg says today. Here’s Rosenberg’s argument for why the U.S. slump could be much worse than the mild 2004-2005 downturn in Britain:
*Britain’s central bank quickly cut rates when the housing market turned soft. The Federal Reserve raised short-term rates 2 percentage points after the housing market started topping out in mid-2005.
*Mortgage rates have risen more in the U.S. than they did in the U.K.
*Prices fell in London but not Britain-wide during the 2004-2005 slump. In contrast, U.S. nationwide prices have already fallen a bit on a year-over-year comparison.
*Britain never had a big overhang of unsold new homes because builders ramped up construction only about 4% a year, vs. closer to 10% a year in the U.S.

This devastating comparison takes away one of the few slender reeds of hope that housing optimists have been clinging to.

Reader Comments


October 6, 2006 4:53 PM

The last news of rates going down was music to our ears and made us wonder why they had not done it before. We never understood why they raised them in the beginning, short of the obvious curb inflation.

It looks like they do not really know how to go about helping the economy and are dabbling here and there hoping to find the right middle. Shivers!

Toby Munk

October 6, 2006 8:57 PM

Having lived in London between 1993 and 2000 and having owned two flats (condos) near Canary Wharf I have to say that there is a few more points that I can see why the US might be worse of for the coming housing downturn.

1) UK homeowners seemed to not tap into home equity just as enthusiastically as US consumers. US consumers might experience what UK homeowners went through in the late 80's... negative equity. You owe more than the property is worth.

2) London has a notorious housing shortage and even as house prices and rent levels moved out of whack (with it being cheaper to rent than to own) all it takes is higher demand for rentals to bring the relationship back to normal tolerances. In the US there is so much sprawl and space to expand that when building a house offered unusual profits due to the rising house prices the construction industry just kicked into high gear and built as much as they can with the second and investment home speculation absorbing the new inventory.

3) The construction sector currently still has healthy profit margins that allows them to still produce fresh inventory and undercut the resale market with incentives so that resales will be competing with new construction in a downward spiral until new home construction no longer offers excessive profit margins, new home construction is scaled way back and inventory can be absorbed. It will take years to play out.

4) Lending in the UK was relatively strict in its lending checks and income verification. No such thing as stated income loans. The risk for defaults is therefore much higher in the US than in the UK. Financial institutions will not hold on to acquired inventory for long in a down market and will try to unload repos quickly adding sales pressure to the market.

5) I suspect there are a lot more second homes per capita in the US than in the UK. Second homes are the first to go when the going gets tough. But if the second home is in a resort location with limited space for expansion (beachfront or mountain resorts) it might be just the wrong move as those locations have a real market with limited supply and real demand. So it might be just the wrong move to sell the vacation home.

6) A lot of homes in the US tend to be in larger developments built by one or two developers with 4-5 models to choose from. When it comes time to sell one is basically competing with other sellers of the same type of home purely on price. The UK has more individual older homes that are unique in their own way. If you see one that you like you can not go to the next house down the road and find the same thing just less expensive.

Just a few thought, it will be interesting.

Nigel Swaby

October 8, 2006 9:07 PM

I don't know much about the UK housing market, but I recently wrote an article on why the housing dip in the US shouldn't be very bad.

Read it here:

Loan Refinancing Will Temper Housing Downturn


October 10, 2006 12:01 PM

agreed the us might suffer a bit more than the UK because of its size but areas where land is limited and are exposed internationnally like NY, LA and Miami will keep shining and even rebound ...there just like london ..everyone wants to live there or at least have a little something there..

I expect the vacation home market to correct slightly because of overinvestment but this is where the money goes and will go for the next 10 year,,,no correction on that..Just looking out for more bargains


October 27, 2006 9:38 AM

Dear Sir

We in Madras(THE UPCOMING IT HUB IN INDIA) experience a similar kind of situation.There is spurt in construction activity where real estate prices are at an unusual rate of Rs.5000 to 8000 per Sqft for a mediocre flat.With interest rates of leading HDFs at 10% looks even more expensive for middle income, predominantt populace of Madras. These fancy prices and interest rates may prove deterrent for housing sales in india.Hence I anticipate a similar bubble very soon in Major Indian Cities like Madras, Pune,Noida and Bombay.

Intertingly BSE prices of scrips of soaring unusually high,disproving traditional theories of PE RATIO.

The housing bubble and stock exchange bubble looks like in the very near future (3-6 months starting from Mar'07 extending for abt 3 years)in India


October 27, 2006 2:04 PM

Thought everyone might enjoy a funny video on the house crash in England.

If you can't open it, go to and type in house price crash.


November 3, 2006 4:13 PM

A housing dip may be bad news for property owners but can be good news for those who have yet to get their feet onto the first rung of the property ladder.

Prices in the UK at this moment in time are very high for property making it near impossible for the first time buyers, especially with property developments buying up the housing before it even reaches the market.

A house price crash for some may not be such bad news.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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