US housing slump fuels crash fears

Foundering American property market could spark global slowdown worse than dotcom collapse

August 27, 2006

The downturn in the US housing market will force businesses to slash 73,000 jobs a month in the new year and could be more damaging to the world economy than the dotcom crash, economists have warned.

After official figures last week showed that the number of new homes sold in July was 22 per cent lower than a year earlier, while prices were almost flat, fears are mounting that the 'orderly' housing slowdown predicted by the Federal Reserve will become a full-blown crash.

'Things do seem to be getting worse very quickly. Freefall is a strong word, but I think it's the right one to use here,' said Paul Ashworth, chief US economist at Capital Economics.

House prices have been rising at unprecedented double-digit rates in recent years, giving homeowners massive windfalls and supporting a wave of investment in new construction. However, the number of unsold new homes is now at a 10-year high.

Ashworth reckons 30 per cent of all the jobs created since the end of the last recession in 2001 - 1.4 million - have been in sectors related to the housing market boom, from construction to DIY stores. As the boom runs out of steam, Capital calculates that 73,000 jobs a month will be lost.

The Federal Reserve left interest rates unchanged for the first time in 18 meetings earlier this month, as chairman Ben Bernanke weighed the risks of high inflation and the threat to growth from the long-expected housing market crunch.

Stephen Roach, chief economist at Morgan Stanley, predicts that the property slowdown will shave at least 2 percentage points off GDP growth next year, taking the US perilously close to recession, as construction spending plummets and homeowners lose the cushion of extra wealth that comes from rapid price rises.

'For a wealth-dependent US economy, the bursting of another major asset bubble is likely to be a very big deal,' he said, warning that, with US fiscal and trade imbalances now larger than five years ago, the fallout for the rest of the world could be more devastating than the aftermath of the dotcom boom. 'A bursting of the property bubble poses equally serious risks for America's key trading partners and for the rest of an increasingly integrated global economy,' he added.

Anxieties about the fragile US housing sector come as analysts in the UK debate whether this month's rise in interest rates will dent prices here. Property website Hometrack will warn tomorrow that the so-called 'mini-boom' that has buoyed the market in London over the past few months will be snuffed out by higher mortgage costs.

Fionnuala Earley, group economist at Nationwide, said she believed the market could ride out the rate hike, but expects it to slow going into the new year. 'There are supportive factors: buy-to-let figures are strong, and immigration suggests there's going to be tenant demand, and there are property supply constraints,' she said. 'But if the MPC's raising rates, it's a warning shot, and people are going to think again about whether they should move and whether they should stretch themselves.'