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Slowing the UK Property Bubble

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As property porn becomes a national pastime we have to ask whether boom and bust is an inevitable feature of the nation’s housing market. Already prices are soaring in London where the growth in sales of properties costing over £1m is the fastest across the whole market. Even a few years ago when we were last in the grips of property madness such a quote would have seemed insane.

Buy at the bottom and sell at the top and you could make yourself far more money than you could possibly earn in salary over the same period.

But the trouble is it doesn’t really work like that does it? Unless you’re a very brave speculator who’s prepared to live in rented accommodation while you wait for prices to fall again, you’ll still need somewhere to live, and once you have owned it is difficult to go back to renting.

It can seem as if we have learnt little from the last financial crisis, as we rush headlong into the next before the recovery has even had a chance to take hold. Yet if you’re reading this from some of the poorer areas of the north east you’ll be forgiven for asking what all the fuss is about. Much of the housing market in the north east is struggling to even reach the growth figures of national inflation, let alone the dizzying figures being banded about in the south east. Allow for the fact that the houses further up the country were a lot cheaper in the first place and you soon see why London is referred to by many as a different country.

What constitutes a bubble and what can be done to stop another occurring? Surely any market whose growth significantly outstrips inflation can be seen as a bubble. Given that, when we remember that inflation is running comfortably under the Bank of England’s 2% target, then the areas that are seeing double digit house price inflation, and even as high as 16% in some areas, are undoubtedly in bubble territory already.

Does what happens in London matter? We’ve already said that London is like another country, but that doesn’t mean that people don’t need sensibly priced housing that enables them to get to work without hours of travel. By the end of this year some analysts are suggesting that the average London house price will be £500K.

Let me say that again. The average London house price is likely to be £500k by the end of this year!

Even if a couple could borrow four times their joint salary they would need to earn £125K between them to afford that. Now for many London wages are more attractive than across the rest of the country, but the differential is only marginal and probably only covers the additional cost of living before housing is taken into account.

What can slow the bubble without bursting it? The Bank of England has various tools at its disposal that it could use to try to slow the inflation, but few of these are likely to be effective as much of this high end market is fuelled by overseas cash buyers.

Raising interest rates is the most straightforward route, but immediately risks plunging hundreds of thousands of people below the level where they can afford to repay their mortgages, after all inflation has outstripped pay rises for years now.

Restricting high loan to value mortgages was an immediate response to the recent banking crisis, yet already you can even get Government support for 95% mortgages through the much debated Help To Buy scheme that is seen by many as just helping de-risk lending for the banks.

We’re hearing more about forcing the banks to increase the capital requirements on their residential mortgages as is the practise in several markets like Hong Kong and Switzerland. Even this isn’t straightforward though as the knock on effect is likely to be that it becomes harder for those people at the bottom of the ladder to borrow.

Increasing supply is the solution we hear of almost daily in the news, but it can’t happen overnight, and already the cheaper land to the east of London would involve massive commutes to the centre or west of town.

Foreign money pouring into London is generally seen as a good thing, but let’s stop for a minute to consider its impact on the workers we all depend on.

Oh, and what about property porn? It’s a lovely term isn’t it? And aptly describes our national obsession with checking out what everyone else has got, whether through the range of TV programmes, or through sites like Zoopla and Right Move.

Image courtesy of luismendozamx


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