What’s up with the UK property market?

Is there a property bubble in the UK or isn’t there? It depends who you talk to. Some experts are adamant that there is a bubble, particularly in London where house prices are astronomical, while others maintain that there is no bubble, and that the UK property market is merely “bloated”. Whatever your opinion, it’s undeniable that house prices are soaring and despite various government programmes to make housing more affordable, many people are still struggling to get onto the property ladder. We take a closer look at the current state of the UK property market so you can decide for yourself whether there is a bubble close to bursting or not.

London vs. the rest of the UK

London can almost be considered a separate entity when it comes to the UK property market and house prices. If you don’t believe it, consider that house prices have grown by an average of around 10% in the UK but by a whopping 20-odd per cent in London (especially South London). One of the reasons for this that London has a chronic house shortage and demand far outstrips supply. Another reason is that London is becoming increasingly popular among international buyers who snap up properties for sale as soon they come on the market – often paying in cash.

The rule of economics is that when demand exceeds supply, prices go up and as people are willing to pay the elevated prices for houses, they go up even more. This continues until the situation becomes unsustainable and it all comes crashing down, and this is why there are fears of a property bubble.

The situation in London has reached such epic proportions that it has raised concern internationally, as experts are worried about the knock-on effects that a burst bubble will have on a still-fragile global economy – not to mention the UK’s economy.

The problem is that while it would be wise to curb the rampant growth in London house prices, the UK still needs to nurture the property market in other areas of the country. It’s difficult to come up with a solution that will simultaneously curb and encourage growth.

According to the Financial Times, the Bank of England has tried to balance both needs by implementing two new restrictions on mortgages.

  1. Limiting the amount people can borrow to 4.5 times their income. As most banks have already set that limit themselves, this isn’t really expected to make a major difference to the housing market.
  2. Being stricter with affordability checks. Mortgage lenders must now ensure that borrowers will be able to afford their mortgage repayments even if the interest rate goes up by 3 percentage points. Again, most banks and mortgage providers already take this precaution, so the restriction isn’t going to have a significant impact.

Experts are saying that rather than focussing on what the restrictions won’t achieve, we should appreciate that the BoE has demonstrated serious intent to deal with the housing situation. Perhaps it will pave the way for further action.

Other recommendations to consider

The International Monetary Fund (IMF) and European Commission might want stronger action than that which indicates intent. For example, the IMF has recommended that the UK government either amend or scrap the Help to Buy mortgage scheme. The scheme has proved inordinately successful with over 7000 houses sold in the UK between October 2013 and March 2014. While it’s great for the UK property market, there are concerns that people are over-reaching and that all of that credit (over £1bn in mortgages) could lead to a whole new economic collapse.

The European Commission has recommended that the BoE raise interest rates in an attempt to cool down the boom. But there are concerns that this will have adverse knock-on effects for the economy as a whole.

The commission has also recommended that the UK build more affordable housing and relook its council tax system. Things that are easier said than done, especially as space is rather limited within London, so building new houses, no matter what the price bracket, presents a problem.

Good news?

At the beginning of June, the Huffington Post reported that mortgage approval rates have fallen for three months in a row. This doesn’t mean that the property market is out of danger, but it does suggest that lenders are being more cautious and that a cooling down period might be at hand.

So, is the UK blowing a great big property bubble, or is the trend restricted to London only? Even if the phenomenon is London-specific, what will the knock-on effects be for house prices in the rest of the country? We’ll leave that for economists to debate. In the meantime, why not take advantage of the blooming property market and put your house up for sale.

Get Started with Sarah Beeny's Tepilo now.