A dangerous house price bubble or Not?

We all heard rumours that the UK property market is again turning into a house price bubble waiting to burst. But is it so? Let us examine this statement deeper.

It is a fact that there has been a surge in mortgage lending today sparked by the government’s initiative Funding for Lending and Help to Buy scheme (I). These are very correct measures aiming to stimulate the property market and assist trapped tenants get onto the property ladder. So much so that in Jan 2014 Help to Buy scheme (II) will be introduced, assisting trapped home owners onto their second move.

Banks and building societies advanced home loans worth £16.6  billion last month, up to 29% on last year and the biggest rise for seven years.

The Council of Mortgage Lenders figures, reveal lending is bouncing rapidly from the depressed levels of around £10 billion to £13 billion a month seen since the banking crisis 5 years ago. Last month’s total was the highest since October 2008.

Pessimists though, are warning that the lending boom could simply “pour petrol” on a market already showing signs of overheating and price more Londoners out of home ownership. They base their worries on the fact that the London market has never really been in the doldrums and therefore the danger here is that affordability of property prices becomes  ever more of a fantasy for more and more people.

Government figures last month showed prices rising at 8% to a record average £425,000 in June compared with 1% outside London and the South-East.

The Treasury’s Funding for Lending scheme, aimed at encouraging bank funding for home buyers and small businesses, and the Help to Buy programme, which has already been taken up by 10,000 new home owners, have contributed to the return of confidence. Borrowers were further encouraged by the Bank of England’s Governor Mark Carney, assuring citizens that its 0.5% lending rate is unlikely to be increased before 2016 and to be more precise until unemployment level drops below 7% from the current 7.8%.

Fixed-rate mortgage deals although at historic lows, started coming back into the market with some lenders offering fixed-rate deals below 2%.  There have even been the first signs of the return of interest-only mortgages with lenders such as Clydesdale and Yorkshire offering amazingly low lending rates for the first 3 years on some deals.

There are those of course who insist that the London property market needs no further stimulus; it’s running too hot already. Lending conditions are so favourable that some experts expected “double digit” rises in property prices next year. This though could be the exception, mainly due to foreign investors trusting and supporting the London property market over the last 5 difficult years with over 37 billion pounds flowing into the market from overseas.

Some journalists and government critics called on George Osborne to scrap the second phase of its Help to Buy mortgage scheme in London, due to come into force January the 1st. However, they seem to be ignoring the Chancellor’s aim, which is to assist trapped first time home owners to move onto their next property thus “freeing” other properties suitable for first time buyers and therefore increasing in a sense the supply of properties onto the First time buyers’ market.

The opposition rightly insists that unless the Government invests in building homes, the country and the capital city in particular badly need,  rapidly rising property prices will put the dream of home ownership beyond the grasp of millions of Londoners. An increase in the supply of New properties is what the UK desperately needs. The country needs around 235,000 new households per year, but only around 100,000 are getting built. This alone creates a tremendous shortage of homes, resulting in a major imbalance on supply and demand of homes and therefore this is having a major effect on pushing property prices upwards.

An improvement in sentiment and activity continues to show in the UK housing and mortgage markets, with a more positive picture also beginning to emerge in the economy.

The Council of Mortgage Lenders, forward estimate of gross mortgage lending in July, reinforces a growing evidence base of a strengthening in the housing and mortgage markets. The CML’s members account for 95 per cent of residential home loans in the UK. There are 11.3 million mortgages in the UK, with loans outstanding worth more than £1.2  trillion. However, with many borrowers still effectively locked out of the market — such as those with impaired credit ratings or negative equity — there is still a long way to go until  lending recovers to the peaks of £30 billion in 2006 and 2007.

Nevertheless leading property figures welcomed the return to more “normal” conditions after so many barren years. RICS insist “The mortgage market has been the pillar of the economic recovery. The freeze on high loan to value mortgages has thawed, and first-time buyer lending is at its highest since the banking crisis.”

Housing minister Mark Prisk said: “Latest figures show our Funding for Lending Scheme, and Help to Buy schemes, and record low interest rates, have led to the highest level of mortgage lending since 2008. But alongside this, we’re also pulling out all the stops to get Britain building, and the increased availability of mortgage finance is boosting confidence in the housing market, and encouraging house builders. We’ve also been working with the Mayor of London to invest billions of pounds to deliver the fastest rate of affordable house building for two decades.

Property experts admit that low mortgage rates, the Government’s Help to Buy scheme(s) and growing confidence about the economy in general contributed to the increase in lending and consequently property prices.

However is this not what we need? Movement in the property market that will increase the supply of properties will free trapped homeowners  and assist first time buyers in getting onto the property ladder?

Is it not vital to encourage builders and property developers get back into the game, creating more jobs (14 new job per unit built) reducing the government’s spending on benefits and increasing its income through taxes?

This is the desired goal, is it not?


Leading Property Expert        


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