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Housing can predict what is to come

In our ongoing series comparing the last recession with this one, we look at the fate of the housing sector, and how it is a leading indicator

It is an enduring theme of any recession: the collapse of the housing market, huge numbers in negative equity, and housebuilders scrabbling to pick up the pieces.

The fate of the housing sector is one of the most interesting aspects of probable any recession for the construction industry: an “early-cycle” sector, in that it goes down and comes back up earlier than others, it can be a valuable leading indicator of where we are.

So how does this recession compare with the last one for the housebuilders? Well, you guessed it, it’s worse.

Housing starts are at an extraordinary low. Even with the “green shoots” we have seen in the housing sector over the last few months, total housing starts this year are set to hit their lowest point since 1945.

The Construction Products Association expects public and private housing starts to hit about 98,000 this year, significantly down on last year’s 130,000.

In 1992, when housing starts reached their recessionary low, there were still 156,000 homes being begun.

But there may be better news: “The sector went in [to recession] so sharply and so quickly we have seen most of the falls already,” says CPA economic policy development director Noble Francis.

Data on new orders at the moment look decent too, even if they are building on historic lows. Figures for the most recent quarter for both public and private housing show a moderate uptick, a good sign even though it needs to be taken with the usual scepticism about blips, dead cat bounces and the like.

Why does this matter? Well, signs of growth in the sector now may be a good indication of what will happen more broadly (if not, for some time, to the rest of the construction industry).

As our second graph shows, the housing sector went in to recession earlier than the rest of the economy in 1990, or just before, and came out earlier.

To be precise, the sector had faced its first two quarters of negative growth in output by the fourth quarter of 1988. The economy did not go into recession officially until the fourth quarter of 1990.

Housing output started to grow again at the beginning of 1992, just as the economy was starting to pick up.

Much ink is spilt speculating on what will happen to the housing market, and with its centrality to the story of any recession, you can see why.