I have routinely argued that the inevitable slowdown in San Diego housing activity and price growth will lead to local economic hardship. This topic is discussed in some detail here and here, but the basic reasoning is as follows:
- Flattening prices will remove the artificial “wealth effect” boost that the San Diego economy has enjoyed over the past few years.
- Flattening prices will also remove the equity-growth safety net that has kept homeowners out of financial trouble during the same period.
- Given the enormous number of San Diegans employed in the housing sector, a slowdown in housing activity may put a lot of people out of work.
If our friends over in the United Kingdom are any indication, I could be onto something. The UK, as you probably know, experienced a home price bubble of downright San Diego-like proportions. As this graph shows, the similarity is quite striking:
The main difference is that the UK housing market has slowed more than that of San Diego over the past year (due probably to the fact that their central bank began tightening 8 months before ours). Aside from the UK’s relatively sharper slowdown over the past year, the two markets have shared many characterstics, not the least of which is the dramatic price growth pictured above.
So how is the British economy doing in the face of the housing slowdown? According to the Financial Times, there is “mounting evidence that the economy has slowed sharply, producing four quarters of weak growth and sluggish consumer spending and plunging the manufacturing sector back into recession.” And just last week, the UK’s Department of Trade and Industry announced that personal bankruptcies have risen by 36.8% on the year, to the highest level in at least 45 years.
The year-over-year median price change for the UK is currently slightly positive at 2.3%. Housing prices have not even declined—yet their economy is already starting to fall apart. When price changes go negative, as they are almost sure to do, the economic situation will only get worse.
Meanwhile, it’s smooth sailing back here in San Diego, just as it was for so long in the UK. But with San Diego home price growth flattening, housing activity slowing down, and the Fed continuing to raise rates, things could get a lot rougher ahead.