Some commentators have become increasingly concerned that the UK housing market is entering bubble territory. Certainly, house price rises have been significant in recent months – but current growth has been from a low base. Even now, average UK house prices are still -21.1% below their 2007 peak in real terms according to Nationwide. Lucian Cook explores whether prices are rising too quickly on page 4 and likens the market now to that in 1996.
Parallels with 1996
The parallel is appropriate as commentators in 1996 were also speaking of fears that another housing market bubble was forming. This seems to be a characteristic of the housing market after a significant fall; memories are short and, just as ‘irrational exuberance’ takes hold at the peak of the market, a pessimistic tendency to revisit the last problem at the first sign of recovery seems to take hold at this stage of the cycle.
The mechanisms of an apparent boom at the beginning of housing market recovery are simple and almost inevitable: as optimism returns so the potential buyer numbers rise, but vendors remain thin on the ground because they are waiting for prices to rise. This instant supply-demand mismatch makes competitive bidding and apparent ‘boom’ conditions inevitable at the start of every cycle. The only time for buyers to really take advantage of recovery is by buying a year in advance – a few months on and it’s already too late for bargains. The initial price rises in this cycle are not the same thing though as the overheating of 1988 and 2007.
In 1996, the prime housing market in London had seen dramatic price rises and an influx of overseas buyers on the back of cheap sterling, particularly in the new build market. Just as has been the case over the last five years, price growth was confined to prime, equity-rich markets but it had been widely reported in the London-based national press and was starting to be mistaken for a national problem.
Mortgage rationing
In this way, concerns about over-heating had been increasing among commentators and policy makers in the capital – even though regions north of Watford had seen little or no growth. The same fears of overheating in the mainstream UK markets have surfaced again – largely on the back of what has been happening in London. This time round, mortgage rationing has ensured that the market is being driven by the equity-rich rather than the mortgage-reliant so prices seem even more out of kilter with average earnings. However, ‘extraordinarily expensive’ is not the same thing as ‘a bubble about to burst’.
Rather, the impact has been the exclusion of large numbers of would-be young owner occupiers from home ownership so the market is simply not the same as it was but much smaller and focused on older and wealthier participants. This is where it becomes difficult to compare with past cycles.
The talk of bubbles may be misplaced in a strict sense, but talk of a housing crisis isn’t. We need to watch the facts and make sure we identify the right problem. There are demographic, capital and affordability considerations that need to be addressed, so we have continued to explore some of them further in this issue of the Focus.
There has been quite a party in London house prices since 2009. Many would say the party balloon looks over inflated but, as Lucian Cook commented recently, not all balloons burst – some can sit in a corner slowly deflating over a long period.
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