Is The UK Really Heading For A Property Bubble?

Homeowners are cheered by positive house price indices but experts say recovery in the property market is still slow outside London. by Michelle McGagh on May 28, 2013 at 14:36 A lack of new properties is pushing up house prices but rises in London have skewed the market, which means that contrary to some reports, the UK is still a long way from a replay of the 2007 property bubble. Followers of house price indices will have been cheered by news of a recovering market with commentators making encouraging noises about how this year will play out for property. Four years of historically low interest rates and more recently the government’s Funding for Lending scheme – which has given lenders access to cheap funds – have pushed mortgage rates to all-time lows and increased competition in the home loan market . Lenders are falling over themselves to take on new business but there is a snag; the supply of property on the market is not keeping up with demand which has pushed up the prices of property available. Data from property analytics company Hometrack shows the number of sales agreed is outstripping supply. Nationally new supply grew 2.8% this month while sales agreed jumped 8.2% higher. This lack of supply is the key driver of increases in property prices but there is also disparity in the way indices record house price movements. Property website Rightmove has the most optimistic outlook on the market, stating that the average UK house price hit a record high of £250,000 this month. However, Ray Boulger of mortgage broker John Charcol, said the Rightmove data was the ‘least reliable’ of the indices as it was based on asking prices rather than actual prices achieved. The more reliable house price indices from Nationwide and Halifax paint a more subdued picture of the UK housing market. Nationwide’s data showed a typical home actually declined in value by 0.1% between March and April, but was 0.9% higher than April 2012. It estimated a typical home is now worth £165,586, far below the £250,000 estimated by Rightmove. Halifax’s index puts the average house price at £166,094, more in line with the Nationwide estimate, but its figures show house prices increased by 1.1% in April. All house price indices operate on their own calculations but one key factor that cannot be ignored is the Bank of England’s mortgage approval statistics, which is a leading indicator of completed house sales. Between February and March this year mortgage approvals increased 3% following two successive monthly falls, but approvals in the first three months of 2013 were still 1% lower than in the previous three months. No bubble yet If demand continues to outstrip supply then house prices will continue to increase but according to the experts, the UK is still a long way from a property bubble. Boulger has revised up his predictions for growth in property this year from 3% to 5% and tentatively expects the same in 2014 but said: ‘We are not near bubble territory yet, we are flat-lined and in real terms house prices have gone up less than inflation.’ However, he added that sellers were being ‘ambitious’ in their asking prices and that as consumer confidence grows in the property market, higher house prices will become ‘a self-fulfilling prophecy’. Craig McKinley, mortgage director at Halifax, part of the Lloyds Banking Group, said the UK was ‘very far from a property bubble’ and predicted growth of between 0% and 2% this year, with house prices expected to rise in 2014. He said that consumer confidence and the economy were still too weak to cause a property bubble. Lenders would also be constrained by new rules coming into force next year that will force them to give a lot more information to borrowers. ‘We are not seeing evidence of a UK property bubble,’ he said. ‘Next year will be when we get a national recovery but we are not expecting runaway growth because the economy and consumer confidence remain weak.’ Philip Croggan of The Economist is more optimistic in his outlook for house prices and said that low interest rates usually translate into a property bubble. ‘In a year or two we will have an equity [stock market] bubble and I would not be surprised if we have another property bubble,’ he said. ‘London house prices are still going up, the yield on commercial property is good and when we have low interest rates it generally turns into a property bubble. ‘In a year or two there will be someone trying to sell you a property fund on the back of two years of [house price] growth.’ Two-speed market As Croggan points out, talk of a property bubble has been centred around price rises in London and the South East but rises in those areas do not reflect the rest of the country . Hometrack figures show that average prices increased 0.3% in April but this figure was skewed by the 0.7% rise in Greater London. Out of the 10 regions Hometrack analyses, which excludes Northern Ireland, four saw no increase in prices in April, the North East saw a 0.1% fall, and the remaining four regions did not see a rise above 0.2%. McKinley said there was ‘definitely a two-speed market of London and the South East versus the rest of the country’ and that in some areas prices were still declining. ‘London and the South East have been affected by external factors like overseas interest and wealthy individuals in the eurozone looking to protect their money,’ he said. ‘There is a lot of foreign money in London that is not in the rest of the country.’ Future increases London-style increases may be a long way off for the rest of the country but there is confidence that property values will continue to tick up next year thanks to the introduction of the government’s Help to Buy scheme. From January 2014 the scheme will offer interest-free loans to buyers and guarantee the mortgages of first-time buyers with 5% deposits, meaning the market will be boosted with more eager buyers. The International Monetary Fund (IMF) has warned that the rush of buyers will be counter-productive . In a report on the UK economy, the IMF said: ‘This measure may temporarily help boost confidence in the housing market, but there is a risk that, in the absence of an adequate supply response, the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing.’ Boulger shared the IMF’s concerns and said the Help to Buy scheme could cause a bubble if the government does not control it or fails to provide an increase in new build homes. Without the housing stock to soak up the increased number of buyers he said the Help to Buy scheme could ‘stoke up house prices to an unhealthy level’ and warned the government may have to cut the three-year long initiative short. However, McKinley holds the opposite view and does not think the Help to Buy scheme will mark the beginning of a property bubble. ‘We do not see that happening in the short-term but it could have an impact over the longer term ,’ he said. ‘We are seeing new builds increase but the question is whether they are building fast enough. ‘We are not overly concerned [that Help to Buy will increase property prices]. There will be more buyers but not exponentially more and they will still need a deposit and credit assessments, which are becoming stricter.’ Taylor Scott International

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