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Dejá vu and risk of UK house price bubbles

Peter McGahan considers why the UK is prone to house price bubbles and how post pandemic savings and attitudes to work could be about to deliver another.

house price bubbles

House price bubbles and crashes, there is always someone with a sage-like view of what the markets will do. Predictions are a great way to sell papers and arguments and that’s about it. Remember that all those who forecasted a crash last year are now forecasting a rise from now?

There are many macro-economic factors that affect a house price, and the permutations for how they might interact with each other are beyond the space of this column.

Bubbles, per se, shouldn’t always be thought of as bad, remember. Are we in a bubble? Yes of course. Will it grow bigger? Yes. Will it go out with a bang or a whimper? That’s the prediction – a prediction based upon the following key points.

Foreseen house price bubbles

Over many years I’ve quoted Yogi Berra’s great comment: “It’s like Déjà vu all over again”.

This is no different. Most countries are facing these issues right now. It’s a global matter. For the most part we believe it’s just happening around us and it’s politicised by those in power as their ‘positive doing’. That’s twaddle. NZ, Canada and Sweden have the most inflated housing markets if we measure via price to rent or price to income.

The US has also had extraordinary growth over the last 12 months with a median of all housing at 23.6 per cent growth V UK of 13.2 per cent.

What are the contributing factors to house price bubbles?

Cost of borrowing – You can borrow money for next to nothing, so monthly cost is much easier via a mortgage. Let’s remember the borrowing rate for a mortgage today is around a third of the cost in 2007 leading up to the last bubble.

Buyers have rushed to move from cities to smaller towns and houses with more space, given the belief that this current health scenario may go on for longer and that working from home is going to very much be a thing of the future. In February, year on year growth showed small towns and villages were almost 50 per cent greater growth than the core cities.

June showed a sharp annual rise of 16 per cent in prices of detached houses in the UK compared to nearly half that in flats/maisonettes.

Governments largely preserved incomes via furlough schemes and those already wealthy became even more wealthy as they weren’t spending, with the UK’s savings ratio blasting through all previous records. That money was ready to be used as deposits. If you want to improve your property, or add on an extension, building supply issues and a lack of workforce mean that availability and prices make this look much less attractive.

This is a very confusing and emotional time (positive and negative) and as such, the ability to keep a clear unemotional head is very difficult but it pays dividends in the long run like every other economic cycle.

Add to this the record financial stimulus across the globe from central banks and their view that the financial policy isn’t causing house price bubbles and you have a perfect combination for a surge in prices.

The housing market has long since been financialised by central banks. It’s a great driver for an economy and gives a feeling of ‘financial wealth’ as people can borrow more against their home. If we have a £100,000 mortgage against a £210,000 house, we believe we are worth £110,000 as opposed to being £100,000 in debt.

If you feel you are worth £100,000, you’ll spend, which stimulates the economy. Easy plan really.

Naturally, what may also come with that is inflation and that is of course the biggest dampener for the housing market as the general strategy to calm inflation is rising interest rates. Those paying two per cent interest rates now who move to a three per cent rate have a 50 per cent increase in payments. Sadly, many who have a mortgage today do not have a thermostat much more than two per cent and rates of six per cent which were the norm pre the financial crisis are like a steam room.

With the UK in the top five in the world as measured by a bubble factor of its price to rent ratio, it’s always worth thinking ahead of the fast-flowing river you are currently on. Better to hear the bottom of a waterfall rather than feel it.

If you have a financial query, please call 01872 222422 or email [email protected] or visit us on wwfp.net.

If you enjoyed House price bubbles, you’ll find more of Peter McGahan‘s columns on our Finance channel.

Last modified: August 19, 2021

Written by 6:02 pm News & Views, Property

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