Housing Bubble fears – genuine or an overreaction?

12:08 PM, 17th September 2013, About 11 years ago 22

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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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Tags: Bank base rate, Bank Of England, Damp, Housing market, LTV, mortgage, Property Investor, Rightmove

Comments

paul johnson

17:14 PM, 17th September 2013, About 11 years ago

Apologies if anybody thought i was being bigotted with my comments about Russian mafia and houses in Kensington and Mayfair, I could just as easily said English stock brokers, Greek,French,Arab businessmen or any other super wealthy group that is inflating prices in the centre of London.
My serious point is that the area's that really could do with a bit of "property inflation" are being told that there is a boom on and they've never had it so good, meanwhile things have never been tougher and rents, and property prices are going down.

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Mark Alexander - Founder of Property118

17:18 PM, 17th September 2013, About 11 years ago

Reply to the comment left by " " at "17/09/2013 - 17:14":

Too late, my Russian wife, who is a Chartered Management Accountant (officially) has already prepared the polonium injection and is on her way to see you 😉 LOL

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Jay James

17:19 PM, 17th September 2013, About 11 years ago

Reply to the comment left by " " at "17/09/2013 - 17:14":

agreed and I saw your point from the off.
didnt see bigotism (is that a correct word), don't think anyone did.
at worst it could have been put nicer, no big deal.

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Neil Patterson

17:20 PM, 17th September 2013, About 11 years ago

Reply to the comment left by "Mark Alexander" at "17/09/2013 - 17:14":

Hi Mark,

I don't think I could encourage trying to keep foreign money out of the UK while we are very slowly recovering from the deepest and longest recession in our recent history.

Don't forget the housing market is only a part of our economic well being and if the economy goes down so will housing.

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Jay James

17:27 PM, 17th September 2013, About 11 years ago

Reply to the comment left by "Mark Alexander" at "17/09/2013 - 17:14":

The idea of restricting inward international property investment (there must be a word from economics for that?) is not unheard of.
I cannot remember from where, but countries have had these restrictions before and maybe still do.
Doing this where such is skewing the UK property market may be a good idea.
It would be a positive move to have only long term property investment and I don't think that's what is going on with the 8.2% increases in London.

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Mark Alexander - Founder of Property118

17:41 PM, 17th September 2013, About 11 years ago

Reply to the comment left by "Jay Jay" at "17/09/2013 - 17:27":

I might be mistaken but isn't there a similar policy in one of the Channel Islands?

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Jay James

17:43 PM, 17th September 2013, About 11 years ago

Reply to the comment left by "Neil Patterson" at "17/09/2013 - 17:20":

hmm. Wonder if it's possible to restrict property investment in London without discouraging non UK investors in general?

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Jay James

17:49 PM, 17th September 2013, About 11 years ago

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

Think so, but that's said with out researching.

Cases of restricting inward investment abound world wide, so from a legislative / technical point of view, I'm sure it can be done with London property.

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Romain Garcin

18:38 PM, 17th September 2013, About 11 years ago

Any restriction would have to be general or perhaps only for non London residents, IMHO. Or only for people/entities from outside the EU.

Note that the channel Islands are neither in the UK or the EU.

In any case, I'm not sure what this would achieve. International millionaires, or even billionaires, are players in a property market that is largely irrelevant for you, me, and 99% of the population.
The rest are attracted to London because of its dynamic economy, so create a natural high demand.

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Neil Patterson

18:39 PM, 17th September 2013, About 11 years ago

We live in a Global market and protectionism rarely worked in the past let alone now.

What I am saying is that to start bringing in this type of legislation for one sector of one market would harm the economy as a whole much more than protect one small part of it.

Don't forget you are only focusing on one small part of the issue and indeed we don't even know if there is an issue. There are many other different factors and ways of affecting the property market (hundreds if not thousands). What is bad for the economy is also bad for housing.

PS the Channels Islands are a tax haven so normal rules do not apply.

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