Housing Bubble fears – genuine or an overreaction?Make Text Bigger
There has been a great deal of commentary in the press the last couple of days raising fears of a housing bubble.
Rightmove increased its forecast for the year from 4% to 6% leading to headlines calling for government to do something about concerns of a debt fuelled crisis in the housing market.
Yes prices are rising, but we are seeing sustained recovery for the first time since the credit crisis outside the economic microcosm of London?
It is this recovery for most of the country, in areas where prices have fallen or been static for a long time and not just one area, that has surely seen the forecast rise recently.
Rightmove report asking prices in London are up 8.2% on a year ago with:
West Midlands up 6.8%
South East up 5.6%
Wales up 3.8 %
East Anglia up 0.8%
The North 0%
Yorkshire and Humberside fell 1.3%.
Overall in the UK asking prices are 4.5% higher than this time last year and have increased on average by £16,000 so far in 2013.
So the questionare:-
- are we right to be worried?
- what factors are involved
- and can we do anything about it?
First of all we need to consider what is really causing prices to rise. Is it demand lead where we are all earning more money, unemployment is down and mortgages are easier to obtain?
Alternatively is it the lack of supply in new housing that is putting the upward pressure on prices?
In terms of industry sector contribution to GDP (Gross Domestic product – the output of the economy) it is the building industry that suffered the worst during the recession and is taking the longest to recover.
In terms of scale, the supply side of new housing has suffered more than any recovery in the economy recently, so it may be this which is the biggest factor for the country as a whole. However, in London there have been many reports that foreign money, especially from Arab states and China, is being invested into the London housing market and could be an external factor fuelling demand lead increases that we can’t control.
At some point limiting factors such as purchasers income and the size of deposits required will come into play with income multipliers and maximum LTVs only able to sustain a certain level of house prices before demand slows back down. This is where regulation of lending could dampen an over heating market putting in place restrictions on lending criteria.
One of the biggest and most immediate fears of property investors is the Bank of England increasing the Bank Base Rate to curb any house price inflation. This is now less likely as the BofE are no longer just targeting inflation levels, but also have the wider remit of encouraging the growth of GDP. Therefore it is less likely that they would consider harming the recovery by increasing interest rates, and more likely that they would look to use regulation of lending to control this specific inflationary pressure.
The Bank of England’s Financial Policy Committee will meet tomorrow, when it will reportedly discuss the issue of a housing bubble and what action it could take.
I certainly see no evidence that we need to panic yet, but it would be very interesting to get readers thoughts on this subject.
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