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

Neil Patterson

14:27 PM, 18th September 2013, About 11 years ago

This is what the Bank of England had to say today.

They do not seem concerned!

Since the spring and after several years of stasis,activity in the housing market had been picking up
and, on the basis of recent indicators, gaining momentum. Although still well below pre-crisis norms, monthly mortgage approvals
had increased by almost a third over the past year. And, according to the average of the main lenders’ indices, nominal house prices in July stood around 4%
higher than a year earlier and so had begun rising in real terms for the first time since mid - 2010
.
In a confidential preview of the survey, the RICS current house price balance had risen to a level last seen at the end of 2009.
There had also been signs of an easing in conditions in the commercial property
market.

Increased housing market activity had the potential to support dwellings investment and spending on associated services, thereby boosting growth overall. And some rise in prices might provide a modest fillip to consumer spending and investment if, for example, the increase in collateral values helped to relax households’ and small businesses’ credit constraints. Nevertheless, the Committee noted that property market developments would become more of a concern if a period of rapid real house price increases appeared in prospect. The Committee noted the fact that the Financial Policy Committee and the Prudential Regulation Authority now had a range of instruments they could deploy to mitigate this.

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20:27 PM, 19th September 2013, About 11 years ago

If the question is "Is there a bubble?" I guess the next question is "What constitutes a bubble?"

As has already been said, in the most of the UK prices aren't doing anything very exciting, yet.

If we believe that inflation really is around 2.7/2.8% (and most of us would suggest that unofficially it's higher) prices in most areas are barely keeping up with inflation.

Depending on which measure you use the long term trend for HP increases is 5% - 8% pa on average and we are not even there yet. If prices are to catch up with the long term trend, they need quite a spurt (It might be that we are now in an era of a new trend line and so that won't happen)

I would have thought that we only need worry when average prices are consistently ahead of the long term trend

Whilst most of us are still looking at prices being below pre-crisis peak, and/or negative equity, I find it alarming that some seem to be trying to destabilise a recovery (by hitting sentiment) before it gets rooted

My guess is that the banks will be happy to see a jump, albeit gradual, to at least pre crisis price levels so that assets on their books match loans made against.

Plus perhaps a bit more for inflation over the last 5 years

Once we get there, depending upon how inflation is playing out, we might see some kind of effort to dampen things a little, but traditionally HP have usually been a couple of points ahead of inflation without doing anyone any harm.

I have to say it has annoyed me that a recovery from rock bottom, which hasn't even got close to "normal" levels of activity and price rises, has already been described as a bubble and I wonder whose agenda we are jumping to, and why.

A couple of years ago Mervyn King said words to the effect of "We must learn to stop calling any increase in asset value a bubble, and any fall in asset value a crash. Increases and decreases are a normal part of market activity".

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