Many of you will have seen the comments on the prospects for the UK this week by Jim Rogers Chairman of Singapore based Rogers holdings. Mr Rogers gave an extremely pessimistic view of the UK with comments  such as “I would urge you to sell any sterling you might have,”. As ‘The Times’ reported “The reaction was instant - though it is impossible to say how much was attributable to Mr Rogers. The pound slumped, by almost 4 per cent at one point, falling to a seven-year low against the dollar and an all-time low against the Japanese yen.”

While Mr Roger’s comments have the potential to become a self-fulfilling prophecy, he did give some rationale to back up his comments. One in particular did stick out as appearing very wide of the mark when you look at all the available data, namely the prospects for the UK housing market. He says the UK housing market is arguably in a worse state than that of the US, given pockets of strength in the US.

Mmmmmm….let’s look at the data that might support that:-

 
US housing market

The main index in the US is the Case Schiller index which produces both national and regional data. The 20 city composite index has been falling since July 2006 and shows no sign yet of slowing. Average values are off over 23% since the peak (up to end of October 2008). Compare this over the same period to the HBOS index which peaked in July 2007 where values are off just under 16% thus far. If you start the comparison of both indexes from the point the US index starting falling, you get the following picture (both indices set at 100 at the start)

You may argue that the above comparison is perhaps biased as the UK graph is falling from a higher point. Accordingly if you compare both indices from the point they both started falling (both set at 100) you get the following picture:-

Whilst both indices are now falling at comparable rates, the UK still has some considerable way to go to catch up with the US particularly as the last set of US results (published 30.12.08) marked the steepest decline in the history of the Case Schiller index.

Additionally as Roger’s alluded to, there are strong regional differences in the US which means that depending on your location you are likely to be significantly above or below the average of the 20 city index. For example, Phoenix tops the chart at over 40% down so far (and still falling) closely followed by the likes of Los Angles, San Diego, and Miami at circa 35% down whereas Dallas and Charlotte are essentially flat.

The cause of house price declines – different catalysts = different results

Our view is that the decline of UK house prices is very much a result of the liquidity freeze. Decades of under-supply, simply resulted in high prices (natural supply/demand economics), supported by readily available credit. It is the withdrawal of credit, particularly to the higher LTV and niche sectors that started the decline and threatens to prolong and exacerbate the decline (more on this in a separate blog later).

In the US the catalyst was several years of very strong house price growth driven by speculation and the oversupply of housing, particular in the boom markets on California and Florida. The growth of the sub-prime market (which at its peak accounted for circa 25% of the overall market) brought new borrowers into the housing sector and with it a construction boom. Prices in the US market peaked and then began to fall simply as affordability conditions deteriorated, speculators pulled out, and confidence plunged. In short people lost confidence that prices were sustainable. It was is the fall-out of the US housing bubble which started the crisis and the UK in this context can be seen as somewhat of a victim rather than an instigator.

Supply and demand

In an earlier blog  we outlined the longer term issues the UK market faces, which will create an increasing housing shortage as time progresses. Unlike the US where land is generally not an issue, the UK, even if planning is relaxed will still face supply constraints. With a high owner occupation level and an ownership mentality, the saying (allegedly from mark Twain) “buy land they ain’t making it anymore” seems very apt. To add one of my own ”the UK isn’t the US so stop the lazy comparisons”