Bubble Talk in the Housing Market

The words ‘bubble’ and ‘housing market’ are enough to make many people pretty uncomfortable, especially with the global financial crisis still fresh in many minds and the UK economy having just begun a slow and gradual recovery. The housing market is showing relatively strong signs of improvement, with house prices recording growth of 0.8% in England & Wales and 6.3% in London in the year to July. However, I for one believe this is a pretty tough bubble that would be quite hard to pop.

Transactions in London were up 0.9% in the year to May and down 0.8% in England & Wales overall. However, compared with the 10 year average, current transaction levels in London and England & Wales are still down 19% and 25% respectively. Slight improvements have been driven partly by a recovery in the economy, and to an even greater degree by Help-to-Buy and Funding for Lending.

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While these improvements are welcome news for most in the housing market, many commentators are raising concerns over a possible housing bubble. In the wake of the global financial crisis caused almost exclusively by a massive collapse of the US housing market, there may be various similarities to the current UK market that would set alarm bells ringing.

The US market bubble was fuelled by low interest rates and loose credit conditions, leading to rather reckless mortgage lending. The UK government has been following a similar strategy to kick start the housing market here at home, focussing on increasing mortgage lending through targeted stimulus packages to give the market a shot in the arm. With the apparent early success of these Government interventions many are worried we are following the same path as our US counterparts.

Some important differences between the UK housing market now and the US market pre-crash should however be taken into account. The UK is dealing with a significant housing shortage, with approximately 150,000 houses being built annually falling short of estimated demand of roughly 270,000 units. In addition, recent mortgage lending in the UK is still strictly controlled by banks. Any home buyer would testify to the various hoops that one must jump through in order to get a mortgage, a far cry from the wide spread NINJA (No Income, No Job or Assets) lending seen in the US in the run up to the market crash.

Furthermore, rising house prices and higher transactions levels have almost entirely been focussed on the London market. This is a market that is very different to the rest of the UK. Some may say that such strong price growth is unsustainable when house prices are already at high levels. However, according to the 2013 London Jobs and Growth Plan, 5.1m (15.8%) of the UK jobs are London, with this expected to rise to 2.2m by 2020 and the working population set to expand from 5.7m to over 6.6m by 2036.

We are living through rocky economic times and many factors remain uncertain. Unsteady global-economic recoveries, persistent Euro-zone concerns and UK factors such as wages and employment continue to dominate headlines. The biggest risk to the housing market would be interest rates rising relatively quickly over a short period of time, and while no one knows for certain if future economic conditions will call for such steps, it is unlikely for the next few years.

I for one believe the London housing market is growing from a strong base supported by good old-fashioned market fundamentals such as good demand, good wages and a good labour market. And while we may not be stoking a wobbly bubble, affordability is a serious concern and more housing across all price brackets needs to be delivered to inclusively meet the needs of all Londoners.