Housing Bubble fears – genuine or an overreaction?

by Neil Patterson

12:08 PM, 17th September 2013
About 5 years ago

Housing Bubble fears – genuine or an overreaction?

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Housing Bubble fears – genuine or an overreaction?

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.Housing Bubble



Comments

Mark Alexander

12:26 PM, 17th September 2013
About 5 years ago

House prices are driven as much by sentiment as they are by economics in my opinion. The widespread talk of a housing bubble will, in itself, fuel some speculation. The whole thing is a self fulfilling prophecy. The key factors underpinning UK housing prices have been unchanged for many decades. Unlike other economies which suffered the boom and bust pre/post credit crunch the UK has always had a supply and demand issue when it comes to property. This is because we are an expanding nation due to our comparatively strong economy making the UK a desirable place to live and UK property a safe haven for investment. That can't be said for America, Dubai and the other countries where hype, speculation and greed were the key drivers of their naughties property boom period.

In part, the UK property booms have been fuelled by the availability of credit, but nowhere near to the same extent as other in countries. At least for now, I think lessons have been learned and new policies have been implemented to reduce the risks of property price booms based on the availability and cost of credit.

The BoE certainly has its part to play in terms of maintaining realistic lending guidelines, as do the CML and the FCA. We are, however, still a free market economy and that means no matter what the regulators do there will still be swings in sentiment which will affect property prices.

Neil Patterson

13:35 PM, 17th September 2013
About 5 years ago

Reply to the comment left by "Mark Alexander" at "17/09/2013 - 12:26":

Yes Mark quite correct, confidence and expectation (sentiment) are economic factors as it is a social science that influence demand.
Paradoxically I think it might actually work in reverse at this point in time as rising prices normally have a positive influence, but with the current concerns it might work against demand.

Mark Alexander

13:41 PM, 17th September 2013
About 5 years ago

Reply to the comment left by "Neil Patterson" at "17/09/2013 - 13:35":

For landlords perhaps, for speculators I doubt it. I suspect the London price recovery has been fuelled primarily by overseas speculators and those who see property in our capital as a safe haven for their money.

Neil Patterson

13:54 PM, 17th September 2013
About 5 years ago

Reply to the comment left by "Mark Alexander" at "17/09/2013 - 13:41":

This type of investment from abroad can easily be switched to different countries or assets, but domestic demand is more trapped to the UK.

Mark Alexander

13:58 PM, 17th September 2013
About 5 years ago

I agree, but is domestic demand actually the cause for concern?

Neil Patterson

14:06 PM, 17th September 2013
About 5 years ago

It's a factor along with all the others and without understanding and knowing all the facts, which I don't think anyone does, by how much is just a guess.

As most Governments have proved in the past and without knowing what will happen in the future economic policy has really only ever been a mixture of best guess and politics.

paul johnson

16:29 PM, 17th September 2013
About 5 years ago

What housing bubble??? rents are down in my area[north east] demand for rental property is down, due to claw back and charges from the council since April my expenses are up,void periods are up, I can honestly say that this is a difficult time for professional LL's here. I keep hearing about a boom and ripples reaching out to the hinterland but it isn't....If the BOE start wopping u interest rates because the russian mafia has pushed prices up in Kensington and Mayfair, it will squash any miniscule recovery thats about to hopefully happen here. I can show people whole villages where property is 40% cheaper than the boom and getting cheaper.

Neil Patterson

16:39 PM, 17th September 2013
About 5 years ago

Reply to the comment left by " " at "17/09/2013 - 16:29":

I agree with you PJ as I was subtly pointing out that it is London skewing the figures for the rest of the country, but it is also a statistically relevant portion of the economy.

We may hear tomorrow the Bank of England's view, but I would be very surpised if interest rate increases are on the agenda.

Jay James

17:05 PM, 17th September 2013
About 5 years ago

Reply to the comment left by "Neil Patterson" at "17/09/2013 - 13:54":

The last few comments seem to refer to a good point.
I wonder if some inward investment (ie that mentioned above) should be seen as the bad guy and not inward movement of people.
(I really have almost no problem with non uk persons coming here and do not wish to start a discussion on this topic, it's not the place I think).

Mark Alexander

17:14 PM, 17th September 2013
About 5 years ago

Reply to the comment left by "Jay Jay" at "17/09/2013 - 17:05":

Agreed, immigration has pro's and cons but over several decades has been one of the pillars of growth in the UK.

Perhaps the easiest way to take control of the property market in London would be to make it illegal for non-resident foreign Nationals to buy property there?

We do need to encourage building though, in particular low cost housing. Another logical solution to that would be to allow pension funds to invest into fully managed low cost housing with planning consents limited to the property only ever being available to the letting market on AST's. Within no time we could see huge investment from SIPP and SSAS pension funds into this market as it has to be better than investing into off-plan Caribbean hotel developments doesn't it?

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