Thought for the day
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Sometimes controversial, sometimes quirky but always thought-provoking.
Michael Baxter, freelance journalist, provides his personal insights on current economic
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30/07/2010 - The US and the UK: a tale of two countries
It's been a funny recession.
Wander into a bar, stroll across a shopping mall, or observe the number of BMWs on our streets, and it becomes clear people are spending.
Take a look at corporate profits in the US, and now in Europe, and you could be forgiven for seeing boom.
It wasn't like that in the early 1990s. My recollection of that recession was that it really hurt.
In the UK I think the big difference this time around lies with house prices. In the 1990s banks were ruthless. Property repossessions were commonplace. If you looked down a street, you would see a sea of 'for sale' signs, and if you had investigated further you would have found a high proportion of those sales were forced. And negative equity was a huge problem. Interest rates were high, and those who were struggling to make their mortgage payments had nowhere to go. And when properties were finally repossessed, their former owners were left with huge debts, and still the debt of a mortgage on a house they no longer lived in. And then a wave of bankruptcies followed, as former home-owners who had suffered negative equity found it impossible to pay rent on their new home and the debt on the hangover from their last mortgage.
Of course, banks may have been victims of their own policy. Their approach to repossessing property led to house price falls, creating even bigger problems for the banks.
Just be grateful it wasn't like that this time. This time around, banks were more cooperative. Maybe it was because they learnt their lesson from the 1990s, maybe it was because they were given no choice by the government that rescued them from potential collapse.
In the US, the story is different. The number of empty homes across the pond is at the highest level ever recorded. Repossessions are ripe. American banks are behaving like their UK counterparts from 20 years ago, and as a result, despite the fact that US house prices relative to GDP per capita are much lower, it seems an odds on certainty that the US is set to suffer a double dip in its housing market. At the beginning of the recession US house prices were much cheaper than UK prices. And yet they have fallen further, and now seem to be set for falling even further still.
But then again, there is one crucial different between the US and the UK. In the UK, if your home is repossessed and the mortgage is for more than the home's value, then it is down to you to pay the difference. In the US, it is down to the bank.
Take that into account and you can see immediately why US banks are so ruthless with their repossession policy. And for US home-owners, the process of having one's property repossessed is perhaps slightly less painful than it is in the UK.
For me, however, the US has one big advantage over the UK.
So, British banks have been more tolerant with customers who are behind with their mortgage. The trouble is, the UK economy is dependent on house prices going up. The National Institute of Economic and Social Research recently predicted that house prices will fall, in real terms, over the next five years.
The fact is, house prices in the UK relative to income are still incredibly high. For as long as interest rates are low, current prices may be sustainable. But if circumstances force rates up; or if we suffer deflation, and wages start to fall in tandem with prices; or if our affordability is squeezed by further hikes in VAT; or if wage inflation lags behind retail price inflation (as it is at the moment); then the UK will probably see another house price crash. In short, the UK is especially vulnerable to changing economic winds.
In the US, we are seeing more of a short, sharp shock. It hurts, but at least moving forward, and once the current crisis is over, the economy will be based on a more sustainable footing.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.
