US and UK housing markets following the Fed rate cut
As the US Federal Reserve cuts interest rates once again, the latest figures show the US housing market slipping into even deeper trouble. The UK looks set to follow it, says M&G’s Richard Woolnough…“The Federal Reserve is slashing interest rates very aggressively in view of the collapsing US housing market and the threat of economic growth falling sharply. S&P/Case-Shiller Composite-20 Index figures released this week showed the downturn is accelerating. US house prices fell 7.7% in the year to the end of November 2007, the steepest fall since the index began in 1987.
“This is bad enough, but digging below the headline year-on-year numbers reveals a startling trend in US house prices. Taking the quarterly house price change, and annualising it, shows that the Composite-20 Index fell 16.2%, while the Composite-10 Index fell 16.6%. The downturn is quickly accelerating.
“As its dramatic cutting of interest rates shows, the Fed is acutely aware of the risks to the economy, and it will be well aware that a falling US housing market has always historically resulted in or coincided with a recession.”
The UK economy also looks to be in trouble, says Richard…
“The Bank of England has been slower to react to the economic risks, having cut rates only once so far. With UK rates at 5.5%, many rate cuts will surely follow.
“Backing up this view are the shockingly bad UK mortgage approvals numbers released yesterday. I believe mortgage approvals are perhaps the most important UK economic indicator, as the housing market is the transmission mechanism for monetary policy. 73,000 mortgages were approved in December 2007, down from 83,000 in November. Such a dramatic slump in mortgage approvals spells woe for UK home owners, and UK house prices look set to fall further over the next six months.
“I think central banks worldwide will react to the slowdown by continuing to cut interest rates aggressively, which is good news for government bonds and investment grade corporate bonds.”