Housing bubble?

We’re finding out when it comes to Britain’s housing market. Over the last twenty years of so, there has been talk of “booms” , “bubbles” and busts, during periods of house price inflation. The last time there was a “crash” was 10 years ago, and I remember it well, I was by then already an experienced estate agent.

House prices fell by 16 per cent in some areas!. Since then, they have broadly remained stable and on an upward trajectory.

If they were ever going to fall, you might have thought that it would be amid the economic uncertainty of the Covid-19 pandemic. Yet, house prices have continued to climb. According to the Nationwide building society, UK house prices were 6.5 per cent higher at the end of 2020 than they were in 2019 – the sharpest rise for nearly six years.

This, in no small part, is because the Government has deliberately introduced policies that will inflate the housing market and prop up the mortgage lending industry. First, there is a stamp duty holiday and, then, the Chancellor announced the return of government-backed 95 per cent mortgages in his economic recovery budget. As of this week, banks such as Lloyds, Santander, Barclays, HSBC and NatWest are offering these.

A housing bubble would be caused in a market where rising prices were not underwritten by the money available to pay them. However, since the global financial crisis and the house price crash it caused, credit has remained cheap. This has remained the case since and continued during the pandemic. This is what keeps the market afloat despite the bloat – but we should be cautious.

The housing market is running incredibly hot right now. According to Rightmove, spring buyers are facing the highest ever prices demanded by sellers. Across Britain, the property website said that the average increase in asking price was £6,733 in April, or 2.1 per cent month-on-month.

Of course, asking prices and sale prices are not the same thing. But, it seems that this is impacting the latter too.

Halifax, recently said that the average first home deposit has gone up by £11,000 since the start of the coronavirus pandemic, are we not supposed to be helping people get on the housing ladder sensibly?

There are hallmarks of a “housing bubble”. However, the bidding wars and price inflation we are seeing is exactly what you would expect in a housing market where mortgage rates are very low.

Here’s the thing, what if house price inflation is here to stay, enabled by public policy which finds creative ways to get buyers into more debt to keep the market moving? What if the “bubble” never bursts?

In 90’s Japan’s housing market was stagnating because of wage deflation which meant that people couldn’t afford standard mortgage terms. To keep it going, 100-year mortgage terms were introduced. These could be passed down through families and enabled people to buy homes they otherwise could not afford, but housing remains unaffordable in Japan for the average worker. (generational mortgages!) no, thank you.

The Government won’t allow a house price crash because the knock-on effect on our economy would be too severe, and maintaining house prices is of higher importance them politically and economically because so much of our economy is now based around the lending which is secured against house prices.

Rising house prices might mean that some people may never get on the housing ladder. This might cause the continued expansion of the private rented sector. But, regardless, the government and lenders are now so reliant on housing that they need people to keep moving house and taking out mortgages to keep the economy cog turning. And the housing market relies on the compliance of consumers – particularly excitable first-time buyers desperate to escape the private rent trap, hence such incentives to entice first-time buyers to purchase a home! ( Help to buy being another one I haven’t mentioned )

It requires their desire to get on the property ladder to be greater than their concerns about the affordability of inflated prices which is a worry, They certainly do put those concerns to one side when they pay increased deposits and enter into bidding wars..

Be careful, do not let your heart rule your head.

All the best, Daniel

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