No US recovery 'until home prices bottom out'

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ONCE home prices in the United States start to bottom out, talk of an
economic recovery will be realistic, according to a senior regional
economist.

Mr Arjuna Mahendran, managing director and head of investment
strategy in Asia for HSBS Private Bank, told a briefing at the Four Seasons
Hotel yesterday that property prices are the key to consumer
spending.

Singapore-based Mr Mahendran said consumer spending will be the
key growth engine behind the US' economic recovery when it eventually
comes.

The strong link between the average US consumer's net worth and
the nation's savings rate means that home owners will be more inclined to cut
spending as the value of their property dips.

Net worth is defined as the
combined value of a consumer's home and pension plan, which is based on the
value of the equity market.

'This recession was marked by a massive
increase in US savings, with the savings rate increasing from 0 to about 6.5
per cent in the last 18 months. That is 6.5 per cent of US$13 trillion (S$19
trillion) lost, which is the annual US gross domestic product,' said Mr
Mahendran.

That cash that is now being saved would have been spent on
consumer goods, often imported to the US.

Mr Mahendran said the pension
plan side of the net worth equation has been taken care of, with the bottoming
out of equity markets in March.

The share markets have bounced back to
a degree but house prices are still falling, prompting savings rates to rise
further.

Mr Mahendran attributed falling house prices to a demand-supply
imbalance in the housing market: New homes are being completed faster than
expected, thanks to government stimulus plans, while take-up rates are low
because of rising mortgage rates.

'What we are looking for, therefore, is
a bottoming in US housing prices... when that bottoms out, we will see the
start of the next bull market,' said Mr Mahendran.

He believes the US
savings rate is already near its peak, and expects home prices in the country
to hit their bottom in the second half of this year, after dropping some 10 to
12 per cent from current levels.

THE
FLAG

'What we are looking for...is a bottoming in US housing
prices... when that bottoms out, we will see the start of the next bull
market.'

Mr Arjuna Mahendran, managing director and head of
investment strategy in Asia for HSBS Private Bank

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