Is there a house price bubble in the UK?
25 March 2014
UK House prices hit £250,000 on average at the end of 2013 according to the latest figures from the ONS, and the average London home would set you back £200,000 more on top of this. In nominal terms UK house prices have now climbed clear of their previous peak back in early 2008.
The renewed rise of house prices, and the OBRs forecast announced last week with the budget of 30% house price growth in the next 5 years, has sparked a debate in the UK of whether we are facing another housing bubble. But do these fears have strong foundations?
Easy money has not returned… yet
As economic historian Charles Kindleberger remarked, “Money always seems free in manias”. At the moment his doesn’t appear to be the case in the UK. Despite schemes such as Help to Buy (which has been extended out to 2020 in last week’s budget), data until the third quarter of last year shows that the proportion of mortgages with both higher loan-t0-value ratios and high income multiples has remained flat for 4 years now, showing caution on the part of lenders. Furthermore, while mortgage lending has been growing strongly towards the second half of 2013, this lending net of repayment i.e. growth in the overall mortgage stock after repayments has been very modest recently.
Despite this seemingly cautious credit growth in the housing sector, house prices continue to grow on the back of strong demand and limited supply, this has been most noticeable in London, where the climb in prices has been relentless [32% increase between Dec 2009 and Dec 2013]. We project that even if growth in London house prices slows, the average London home could be double the price of the UK average by 2020.
London first-time buyers crowded out
The impact of this will fall hardest on first-time buyers; the chart below shows that house price to earnings ratios for first-time buyers has been increasing rapidly since 2010 in London, which has been out of sync with the rest of the UK. Mortgage payments for first-time buyers in London are also already over half of take-home pay. While this is lower than at the peak of the housing boom, this proportion is likely to grow interest rates increase to more normal level. Again this has been a divergence from the rest of the UK where this proportion has been falling in the low interest-rate environment.
One reason cited for the very high demand for London housing has been investment from overseas buyers. Essentially, London property is acting as a safe haven investment. Therefore, unless expectations from overseas shift, we might expect demand to remain robust. However, demand is likely to remain strong as political instability continues in Eastern Europe & North Africa and volatility in emerging markets persists.
Is there a house price bubble?
Based on these four metrics there seems to be little evidence to suggest a house price bubble at the UK level. In Northern Ireland for instance, house prices have only just turned a corner having bottomed out in 2013. However, the London picture is more mixed. While credit growth seems relatively cautious, concern will grow if price to earnings ratios, and mortgage repayments as a portion of income continue to grow toward unsustainable levels, and keep diverging from the rest of the UK.