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Is The UK Housing Market Bubbling?

Is the UK currently experiencing another bubble in the housing market? The answer to this may depend on where you live as much as whose opinion you favour. While some industry experts claim house prices across the UK are spiralling out of control, data from the UK Land Registry shows that three-quarters of UK property prices rose by less than 4% in the last 12 months, and that average house prices outside of London and the South East are still below 2007 levels. At the same time, there’s no doubt that the housing market in London and surrounding areas is experiencing rapid gains with a double-digit increase in the previous 12 months. Will this apparent overheating of the capital’s housing market lead to a crash – or at least a temporary bursting of the bubble – or will these rapid price rises extend to other parts of the UK as well?

According to Robert Chote, head of the Office for Budget Responsibility – the Treasury Chief’s watchdog – average UK house prices are set to rise by around 30% over the next five years. This upward drive is primarily being caused by a lack of supply to match rising demand, together with higher mortgage lending, government-backed incentives such as the ‘Help to Buy’ scheme and growing confidence in the UK housing market. If these predictions prove accurate, this would increase the value of an average home in England to around £258,000, a rise of £77,000 over current figures.

Housing prices

However, while Mr. Chote acknowledged the current spike in house prices in London and the South East in his recent statement to the Treasury, he argued against the description of the current housing market as a ‘bubble’. Instead, he predicts that the growth in house prices nationwide will be a slower and more natural process, with gains decreasing from 8.5% this year to 3.7% by 2017. While there may be some bubble-like conditions caused by speculative activity, the main driving force behind the rises is the lack of available housing stock to meet demand, a situation that will inevitably drive prices up until it is properly addressed. OBR economist Steve Nickell agreed, telling MPs: “A bubble arises when demand is being driven by people wanting to get in because of expectations of price growth rather than for somewhere to live.

Their comments come on the back of figures from the Office for National Statistics showing that while average wages across the country had risen by just £417 in the last 12 months, the cost of an average home had jumped by £17,000 in the same period. According to the ONS, house price inflation is increasing at 5 times the rate of earnings, a rise driven by increasing debt being shouldered by homeowners. According to Steve Nickell, “The house price to income ratio has been growing for the last 40 years but that cannot go on forever because everything you consume would become housing and there would be nothing else left.”

house for sale

However, the Home Builders Federation has warned that the housing shortage in England has hit a watershed mark of one million homes, with an average of just 115,000 private homes being built annually during the previous decade. The HBF stated that around 260,000 homes would need to be built each year if households are to be gradually priced back into the market, and a more ambitious target of 320,000 annual new builds would be required to actually improve market conditions. This level of annual building activity has only been achieved in 4 years during the entire post-WWII era.

While there’s no doubt that the dizzying price rises in London are fuelling concerns of a speculative bubble, researchers still point to increasing demand and a lack of supply as the primary factors fuelling the rise. According to new research by Countrywide, for example, there was a 22% drop in London in the available stock on the housing market between February of this year and last. The government’s ‘Help to Buy’ scheme, which some analysts have accused of fuelling price increases, has actually had comparatively little impact on London, with just 1 in 50 new transactions supported by the scheme. This is in contrast to the North East of England, for example, where 1 in 10 houses are purchased using the ‘Help to Buy’ scheme.

The bulk of evidence and expert opinion suggests we are a long way from a housing meltdown,so no need to worry if you’re buying a house now, although it’s arguable whether increases in London and the South East can continue at the current rate. However, the widening gap between average wages and the cost of an average house means it is harder and harder for the young and those not already on the property ladder to join it. This is surely not a desirable long-term situation and governments unwilling to tackle the housing shortage head-on may face the electoral wrath of a growing army of those unable to envisage ever owning their own property.