Ten years ago, the GBP/USD exchange rate was 1.61. Today, it’s 2.02. Over that
Economist tells us, UK housing prices have risen by 211%, compared to just
120% in the US. Which means that in dollar terms, UK house prices have actually
risen by 265% in the past ten years – more than double the rate of appreciation
in the US.
As the Economist explains, the prick which caused the US bubble to burst was
not overstretched valuations, but rather subprime mortgages:
What sets America apart is the time-bomb laid by subprime mortgage lending
in the late stages of the housing boom. The way many of these deals were structured—two
or three years of low “teaser” rates, which then switch to much
higher tariffs—gave homebuyers with tarnished credit records a free
option on house prices. If prices are expected to rise enough, borrowers may
be willing to pay higher interest charges in order to keep the equity gains.
If prices fall short of their hopes, borrowers have an incentive to default.
Or, to put it another way, if Alan Greenspan had wanted to burst the housing
bubble, he probably couldn’t have come up with a better way of doing it than
to encourage the widespread sale of subprime mortgages.
(This also, by the way, helps to explain why the New York housing bubble hasn’t
burst: there are basically zero subprime mortgages in Manhattan.)
So the US might be going through some nasty housing-related pain right now.
But if this pain has prevented the bubble getting much, much bigger, then maybe
it’s not such a bad thing. Because if and when the bubble bursts in places like
the UK and Ireland (+251% in 10 years, in local-currency terms), the aftermath
there could be much worse than it currently is on this side of the pond.