According to the Federal Housing Finance Agency, US house prices rose 7.2 per cent in the year to March, after rising in the two previous months. You would need to wind the clocks back to May 2006 to find the last time the annual rate of house price growth was so high.

According to Hometrack, UK house prices rose 0.4 per cent in May, which was the highest rate of month on month house price increases it has recorded since May 2007.

The similarities between the UK and the US are many, but there are also glaring differences, and it is the differences that are the key.

Take one similarity: the government. The US government set up Fannie Mae and Freddie Mac as a way to provide support to the US mortgage market, via the inference of government backing. The inference became real, of course, in 2008, when the US government was forced to step in. But Fanny and Freddie were the means by which the US housing market boomed for so many years.

In the UK it is a lot like this, it is just that the UK’s equivalent of Fannie Mae and Freddie Mac is still being fashioned by the creativity of George Osborne. At the moment, the UK version answers to the name ‘Help to Buy’, or even ‘Funding for Lending’, but the UK is adopting a similar idea to that adopted in the US many moons ago. The difference is that Fannie Mae and Freddie Mac were formed in the past, and may have been the main contributors to the last US financial crisis. The crisis made from Osborne’s scheme is in the future.
Here is another similarity: lack of supply. This is how Hometrack put it: “It is a lack of housing for sale that is acting as the primary driver of price rises.” In the US, too, lack of supply lies behind the resurgence in the housing market. The difference is this: in the US supply shortage was preceded by over-supply, as repossessions in the US led to a massive inventory of unsold property. Because of this over-supply, house building was limited, and now that the inventory has been cleared to a large extent, we find a property shortage. In the UK, limited house building was largely down to restrictive planning regulations, and lack of demand caused in part because house prices had become unaffordable.

In the UK, banks learnt from the lesson of the early 1990s, and did everything possible not to repossess property when its owners fell behind with payments. In the US, a more ruthless strategy was adopted. The high levels of repossessed property sales in the US led to over-supply. In the UK, too much supply never was an issue; rather the issue was lack of finance, and the massive ratio of average house prices to income.

Here is another difference. In the UK, the average house price in April was £166,094, or 4.58 times average earnings, according to Halifax.
In the US, median house prices were around $184,000, (that is around £122,000) or the ratio of US house prices to income is around 3.


In the US, rising house prices may well provide evidence that the US economy is mending. In the UK they provide evidence that we have not moved forward.

© Investment & Business News 2013