The US economy de-couples?

The past couple of months have given US economy bears like myself plenty of cause for reflection.  Is there more life in the old dog than we thought? 

There are several reasons to think so and this has caused me to reconsider another article of faith: the US and UK economies are in a similar dire state for similar reasons and share similarly gloomy outlooks.  In reality Americans have far more grounds for optimism than Brits.  These are, to boil them down to bullet point form:

Growth – the US is growing at 2.8% on an annualized basis in sharp contrast to the flatlining or declining economies of Europe

House prices bottom out – After 5 years of misery and falling property prices there are signs of improvement.  Getting prices down to their long term average levels was painful but necessary to squeeze out the excesses of the boom. 

Falling debt – unlike most developed countries the US has actually seen overall debt levels fall.  The US government might still be running up the national debt but the private sector has cut indebtedness faster. See this chart comparing rich country debt levels.

Trade – the official trade gap has been shrinking and research suggests the American trade position is not as bad as the raw data suggests (the import of a manufactured good like an iPad is counted at its full value but a lot of that value actually belongs to the US multinationals who make the profit and provide the design and technology).

Reserve status retained – The dollar has benefited from not being the Euro,  or the Yen or the Pound for that matter, and is once again the undisputed reserve currency giving the US plenty of scope to continue its low interest rate policy and even splash out some QE if the Fed feels the need. 

Fiscal light at the end of the tunnel – at the height of the debt ceiling crisis last year the US looked like a fiscal basketcase but there are signs that the politicians will start to reduce the deficit.  They are helped by not being overtaxed.  Unlike the UK and Europe they could cut a lot of the deficit just be closing some tax loopholes and raising taxes on things like fuel.

Energy – the US is now a net exporter of fuel thanks to the boom in shale gas production. 

Corporate giants - corporate profits are at record highs.  The results from companies like Apple and Caterpillar took the breath away this week.

The contrast with the UK couldn’t be clearer.  Britain is stagnating and looks horribly overburdened with taxes and debt.  The house price boom excesses have never been unwound.  Bank and even business generally are under siege from protesters and EU regulation.  The challenge of energy security is being made harder by self-imposed green targets. The trade deficit is as bad as ever.

I may not a fully-fledged US bull but there is no doubt that it is looking a lot better bet than the UK right now.

From our website: Spanish non resident tax

The next thing to hit Spanish property?

I posted back in January about the outlook for Spanish property prices in 2010 and made the point that there was a threat from the banks. Not just a continuing reluctance to lend on favourable terms, even though that is a big factor which I have seen first hand throughout the year so far. But also because the banks are getting more aggressive at getting rid of the mountain of properties they have been forced to take onto their books.

Previously they had been sitting on unsold properties because if they sold them at heavy discounts that would involve taking a loss. The Bank of Spain had changed the rules to discourage this by asking them to value their property portfolios more realistically. The fear was they would sell at any price. A client told me of a 50% reduction he got on a villa he is buying from the banks so maybe this is being borne out.

Now I read on a forum that the Bank of Spain has also told the construction companies and property developers something similar. To quote:

"The Bank of Spain (that regulates Spanish banking) has told the banks and construction companies that they must value unsold property at 60% of its official valuation (tasacion). This is important because these companies have been unwilling to sell property as discounted rates over the past few years because they have been able to put 100% of the official valuation onto their books. i.e. their unsold properties are worth more to them unsold, than if they actually sell them.

Now they have to value at 60% tasacion, this should incentivise them to lower the prices of their property and actually get them sold. Therefore hopefully (or not depending on your situation) we'll be seeing big drops in Spanish property prices in the next 12 months."

This together with the austerity measures announced and turmoil in the Cajas and the markets (Spanish stock market down 11% in May), suggests things might be dificult in the property market for the rest of the year. The austerity measures include a rise in VAT on new properties and possibly a rise in transfer tax from 7% to 8% in most areas for second-hand sales (see explanation of how IVA is charged on Spanish property on our website IVA on property sales).

Related posts and articles:

Why Spanish Property Prices Will Stay Depressed

Spain's economic crisis turns nasty

2010 Spanish property market outlook

New Year - fresh dawn of optimism on the Spanish property front? I have posted on Spanish property prices a couple of times mainly to update readers on my downbeat August article "Ten Reasons Why Spanish Property Prices Will Stay Depressed". The ten reasons basically hold but I was hoping for some reasons for cheer by now. Perhaps some sign of prices stabilising with Euro interest rates set to remain low and economic recovery elsewhere in Europe under way.

Instead the New Year has bought bad news with a depressing ring of familiarity to it. First up we have news that several more British owned properties in Almeria are to be demolished as they are illegal builds. The attendant publicity in The Telegraph, Sun, Mail etc could hardly be a worse start to 2010 for those charged with persuading Brits that buying Spanish property is safe. "Happy New Year - We're Going to Bulldoze your homes" was the Mail headline.

http://www.dailymail.co.uk/news/worldnews/article-1239219/Bulldozer-threat-Britons-villas-Expats-Spain-fight-save-homes.html

Secondly came headlines about a tidal wave of repossessions and banks dumping their property portfolios onto the market as a result of changes to accounting rules. The respected website spanishpropertyinsight has the full story:

http://www.spanishpropertyinsight.com/buff/2010/01/11/tidal-wave-of-repossessions-in-2010/

Where does this leave us? With many of my 10 reasons why property prices will remain depressed still in place (particularly the surplus of properties on the market and sterling weakness) 2010 doesn't look to clever. BBVA said in December they expected a further 12% fall in 2010 - worse than the 9% seen in 2009. Let's hope things are better than that.