Who is talking of a property bubble? Part 1

publication date: Sep 7, 2015
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author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Who is talking of a property bubble?

I was a bit surprised when this subject came up, again.

I can’t work out whether there are some people who are just hoping prices will fall or if people that talk about bubbles all the time just don’t actually bother to look at any housing stats.

I think what it is though is that as soon as house prices rise, someone shouts ‘bubble’ and as soon as they start to fall, someone else shouts ‘crash’ and for those who have been predicting prices will fall, they say ‘I told you so’ - even if they were making these claims years before!

So here we are again…and as it’s in the news

Are we in for an 18 year slump 

Is the property bubble bursting again? 

Guardian comment

I thought I ought to get my head around the latest ‘reasons’ for property prices being in a bubble and about to fall.

Lets start with, are we actually in a bubble?
I thought I’d start with the basics, partly to remind myself what causes a bubble in any market.  There is a really good book called “When bubbles burst: surviving the financial fallout” and I think the author, John P Calverley did a good job of helping us to understand how to spot a bubble.

He points to things like:-

  1. Rapidly rising prices
  2. Over-valuation compared with historic averages
  3. A good reason for the higher prices
  4. Considerable media coverage
  5. Something new technology wise or a paradigm shift
  6. Increase in lending or different policies
  7. The economy in good shape
  8. Debt increasing and an ‘easy’ monetary policy
  9. Depressed inflation
  10. Strong exchange rate

So do we have any of these currently?
Well property prices are showing a recovery in some areas, but not much outside of London and the South East. When they do increase, they are going up by 15-20% year on year outside of London and around 15-30% in London.

This compares to around 25-30% annual increases after the last crash in areas outside of London and 30-40% increases within London. So the rate of growth we are seeing since the last crash is a lot lower than after the 1990s crash.

Also, most areas from our Property Price Report are still showing the average annual increase of around 5% outside of London and 7% within London.

Out of 22 towns/cities, only nine are showing signs of prices rising above their norm. Three of the nine towns/cities property prices are still below the property price averages they were pre-credit crunch levels. Another three of the nine are only just rising above their long term average.

But the last three areas which are London, Reading and Brighton and Hove are performing well above their long term average and prices are up double or more of their average.

The main reason prices are going up in these areas is due to a lack of stock and strong wages/economy in these areas, allowing buyers to bid up the prices. And the market is very strongly influenced by confidence, which does seem positive at the moment, but is easily spooked.

Looking at other factors, there isn’t huge amount of ‘media coverage’ and the only ‘paradigm shift’ that we’ve seen in the last 12 months is a negative one which relates to lender’s policies. It’s the Mortgage Market Review which makes it more difficult to secure a mortgage and the limit lenders can lend at 4.5x people’s wages. So this should start to impact and hold property prices back, not propel them forward.

There is however depressed inflation and the £1 is strengthening and debt is increasing to around £9,000 (not including mortgages) per person according to PwC, although much of this is due to student debt).

So are we in a bubble?
If prices were still going up or we were seeing a rapid spread of price growth out of London into the regions such as Wales and the Midlands, then maybe there would be some danger. But overall, prices at the moment do seem to be slowing growth wise, despite the stock shortage.

And with the tightening of lender policies (and self-cert going) as well as a reduction in tax relief for buy to let investors, balanced against the ‘giveaways’ of the government to first time buyers, this doesn’t, so far ‘feel’ like a bubble.

But, wait to have a look at my article at the end of the week: ‘if we are in a bubble, what would happen and what should you do?’

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