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US housing collapse: lessons for the UK

Allister Heath
IF you thought Britain&rsquo;s house price collapse has been dramatic, wait until you look at America&rsquo;s. The latest US house price figures reveal that the once booming city of Phoenix, Arizona, has suffered an astonishing 53 per cent collapse in prices since their peak in June 2006. Prices in Las Vegas are also down by over 50 per cent, while the national figures make grim reading.<br /><br />The S&amp;P/Case-Shiller index recorded a 19.1 per cent decline in the first quarter of 2009 against the first quarter of 2008, the largest decline in the report&rsquo;s 21-year history. As of March 2009, average home prices across the US were back at levels last seen in the fourth quarter of 2002. Prices are down 32.2 per cent since their peak in 2006. It is not disastrous for all Americans: New York property prices remain 73.4 per cent up on January 2000, though they are now down a UK-style 19.7 per cent from their peak. But while New Yorkers are still in the black, we should feel sorry for anybody with anything to do with Detroit, home of the crumbling US car industry, where prices are 29.0 per cent lower than in January 2000 and &ndash; shockingly &ndash; back to 1995 levels.<br /><br />And while strong consumer confidence figures suggest that the US economy is beginning to improve, house prices are still falling, in many cases at an accelerating rate. Minneapolis had a record monthly decline of 6.1 per cent in March, the largest monthly drop of any metropolitan area in the history of the indices. Detroit and New York also reported their largest monthly declines in March, tumbling 4.9 per cent and 2.5 per cent respectively.<br /><br />The lessons for us here in the UK are clear: house prices can fall by far more and for longer than people usually imagine. They also tend to fall much more heavily in areas that are suffering from the worst economic problems, or where there has been the most new houses built (in the UK context, this suggests that new build flats in big cities still have further to drop). Last but not least, prices can undershoot just as easily as they overshoot. The trick, of course, is to work out when value has returned to the market and then to pounce. But only the very brave will be buying US residential property just now.<br /><br /><strong>$10BN FACEBOOK</strong><br />WHAT makes yesterday&rsquo;s investment into Facebook noteworthy is the optimistic valuation it places on the firm. Digital Sky Technologies, based in London and Moscow, paid $200m for 1.96 per cent of Facebook, meaning it thinks the whole firm is worth $10bn, far more than sceptics had feared. While much less than in 2007, when Microsoft bought a small stake valuing the firm at $15bn, this is still good news for the site.<br /><br />The extra capital could be used on acquisitions. But it would make most sense for the firm to boost the capacity of its servers and data centres, which are under intense pressure as usage of the site continues to grow.<br /><br />Facebook is on track to increase 2009 revenue by 70 per cent, and is expected to become cash flow positive next year. Given the disastrous advertising market (including in the non-search online segment), Facebook&rsquo;s public relation blunders and growing fears about the ability of free sites to become profitable, this is encouraging. The web 2.0 business model may even live to die another day.<br />allister.heath@cityam.com