Business Analysis: Property market cools in Britain, but in US it's the latest gold rush

When a property market is on the boil, every country has a different buzzword. England's speciality is gazumping. In the US, a system of early, legally binding sales contracts makes that practice all but impossible. Instead, "flipping" is the thing here - buying a property and selling it on in weeks or even days at a tidy profit, which you use as a down payment on your next real estate flutter.

When a property market is on the boil, every country has a different buzzword. England's speciality is gazumping. In the US, a system of early, legally binding sales contracts makes that practice all but impossible. Instead, "flipping" is the thing here - buying a property and selling it on in weeks or even days at a tidy profit, which you use as a down payment on your next real estate flutter.

Right now in places such as southern California and Florida, properties are flipping faster than in the craziest pancake parlour. The great British property boom seems to have ground to a halt. But in the US, the signs are growing that a long surge in prices is turning into a speculative frenzy that, experts increasingly fear, could portend havoc for the national economy.

In the hottest US markets, such as Miami, Las Vegas and San Diego, a home or condominium apartment may change two or three times even before it's built. Much of the buying is taking place - in classic speculative fashion - on the margins, where a buyer need put up only 10 per cent of the price to secure ownership of a property, which he then sells on. As the new speculative adage goes, "Why buy one home for $200,000, when for the same money you can get 10?".

Just as in Britain, dinner party conversations that used to be about schools or sport now have one constant topic: property prices, and the outrageous price the neighbours got for their house across the street.

Even Alan Greenspan, the Fed chairman who weighs his words as a jeweller weighs fine diamonds, has expressed concern at the "froth" generated by rapid sales and "unsustainable price speculation" in some parts of the housing market - though he has disputed suggestions of a giant nationwide real estate bubble. Indisputably however, one asset boom has replaced another as a driving force of the national economy.

Five years after it peaked at 11,723 in January 2000, at the height of the dot.com boom, the Dow is drifting around 10,500. Since 2000 however, the median price of a home has risen 80 per cent in places such as New York and Washington, 90 per cent in Miami and 100 per cent in San Diego. If anything, the pace is picking up, even as the warnings from on high multiply.

According to the National Association of Realtors, sales of existing homes rose by a seasonally adjusted 4.5 per cent in April from March. The national median price of a home jumped 15 per cent in a year to $206,000 (£113,000), the biggest annual gain in a quarter of a century. In a recent study, the respected Bank Credit Analyst (BCA) research group declared that housing had taken on an alarmingly large role in the US economy and financial system, and that it would be "traumatic when the bubble bursts".

There was, the BCA warned, "growing speculation" in US housing, by both lenders and borrowers. Real estate lending now accounted for a record 53 per cent of all bank loans, while investment in residential real estate represented 35 per cent of all private investment, its biggest share in more than three decades. One in three US homes today is bought not as a residence but as an investment.

There are of course some perfectly sound and respectable reasons for the great American housing boom - decent economic growth (of 3.5 per cent, according to revised new figures for first-quarter GDP in 2005), a robust jobs market and continuing demographic expansion. But the main factor is interest rates.

Since the Fed started tightening its policy stance in June 2004, its key short-term rate has climbed from 1 per cent to 3 per cent, and the central bank has signalled further increases over the coming months. The yield on 10-year bonds, on the other hand, has actually fallen by 50 basis points over that period. Average rates for a 30-year fixed mortgage have barely shifted over the past 12 months, at about 5.8 per cent.

Even Mr Greenspan confesses himself baffled by a "conundrum" that defies the usual pattern whereby short-term and long-term rates rise or fall in tandem. The consequences, however, are crystal clear. Low long-term rates mean cheap mortgages, a strong demand for housing, and thus a surge in prices. Stir in a flat stock market, and every ingredient of a property boom is in place.

As the market has grown ever hotter, so have the risks. Once upon a time there were solid, old-fashioned 15 or 30-year repayment mortgages. These days, more than half of all borrowers are taking out variable or interest-only mortgages, with initial rates as low as 3.5 per cent - either because prices are so high they can't afford to repay and/or because they are convinced the value of their property can only increase. Nor does the housing market function in a vacuum. Property has replaced the stock market as an anchor of national prosperity, and generator of the sensation of wealth. As in Britain, Americans have been taking equity out their homes, turning it into cash to fuel the consumer spending that has underpinned the recovery. So far so good.

Maybe the good times will continue to roll for a while yet, and Mr Greenspan (and whoever succeeds him next year at the helm of the Fed) can again engineer a soft landing. But it not, things could get scary.

Foreign central banks, who have underwritten the import-driven US recovery by buying longer-term securities (thus helping keep long-term rates low) might get cold feet about the dollar. If so, the central bank would have to raise rates aggressively to attract capital inflows to finance the huge trade deficit. Mortgage rates would soar, house prices would stall and drop.

Headlines would no longer be about flipping and pre-dawn queues to buy condominium apartments in Florida, but about repossessions and negative equity. Suddenly, consumers would not feel so rich, and the wider economy would take a nosedive. This is the hard landing whose spectre haunts US policymakers. "It makes me very uncomfortable," Jack Guynn, the president of the Atlanta Federal Reserve noted a week ago, complaining about the "aggressive financing" contributing to the boom. "Some buyers, some builders and some lenders are going to get burned."

The optimists point out that America's property market is not homogenous. It may be boom on the east and west coasts, but the heartlands have thus far mostly been spared the excesses. And time at least may be on the optimists' side. If history is a guide, it could be a while before Mr Greenspan's admonitions come to pass. It was in 1996 that he warned of "irrational exuberance" in stock markets. It took four years for that bubble to burst. If the pattern holds, the property bust won't happen until 2009. By then, today's flippers will have moved on to pastures new.