The house price boom looks dangerously like a bubble now

UK house prices rose 10.9% in May.

This is the fastest growth seen in nearly seven years, according to Nationwide.

Average house prices have hit a new record high of £ 242,832 (to be precise).

It seems that an already expensive housing market is now uncomfortably approaching the territory of the “bubble” …

Here’s why home prices keep rising

There are many reasons why housing market activity is racing in the UK right now. Monetary policy is loose and, more importantly, credit flows freely into the housing market as mortgage lenders compete for business.

People – especially in the wealthier demographics – saved money during the lockdown, so they have more money to raise house prices (or spend on expansions and renovations and the like).

And people are also moving a little more than before. You have a large group of people moving from very expensive areas to areas where prices have always been cheaper due to the “commute discount”. The commute discount has now diminished, and in the meantime you have an influx of psychologically entrenched buyers at much higher prices.

My hunch – and this is only a hunch – is that this leads to lower price sensitivity. If you are selling an apartment in London for £ 750,000 and see that you can get a three bedroom seaside house for £ 400,000 in an area you are not very familiar with, you are unlikely to haggle as hard or quibble. a bit like you’ve just moved to an equally expensive apartment.

None of this is unique to the UK market. We are seeing similar booms in various markets around the world. (Indeed, the other day, CNBC commentator Kelly Evans did pretty much the same thing in the US market right now – “even people who pay more than asking price in Denver … can pocket money. earnings if they sell in California “).

The only thing that is unique to the UK market is the property tax exemption on stamp duty.

At the end of that month, the holidays become less generous – the threshold drops from £ 500,000 to £ 250,000. Then, from the beginning of October, the threshold drops to £ 125,000. (That said, if you’re a first-time buyer you still won’t pay any stamp duty up to £ 300,000 and a reduced rate up to £ 500,000).

(A little rant while we’re at it: I just reviewed the stamp duty rules. It’s really quite amazing how successive governments have managed to make what was once a relatively simple tax at least the standard daily needs – in a complete quagmire of “ifs, but and maybe.” Governments spend a lot of time complaining about loopholes, but it would help if they stopped creating so many).

Some commentators believe (or hope) that the end of the stamp duty holiday will halt the pace of house price growth. I take note. Earlier stamp duty holidays have tended to anticipate purchases that would otherwise have been made later (or not at all).

However, I wouldn’t bet on it.

The thing most likely to burst this bubble

It would be nice if the end of the stamp duty holiday injected some sobriety into the real estate market. But when these things start, they tend to take a life of their own. And there are strong signs – I mean, beyond the rampant activity levels and double-digit price hikes – that we’re entering manic territory.

Affordability has been an issue in the UK for decades, but even by UK standards it’s getting tough. According to Nationwide figures (by no means the most conservative measure you can use) the UK property price-earnings ratio has a long-term average of just under 4. , 5.

Now – a caveat. This dates back to the early ’90s. Like most things – including the Shiller price / earnings ratio of stocks – the low interest rate environment seems to have pushed up the long-term sustainable average. It should therefore also be noted that the p / e ratio of dwellings has not been less than 4.5 since the early 2000s, and even at the bottom of the last crash (around 2009) it has barely touched the level 5.

However, even if you try to be very forgiving, the numbers are really going up now. It’s back above 6, and it’s never been higher than in the run-up to the last big bubble, in 2007 (when it hit just below 6.5).

Now, you can certainly argue that interest rates are much lower now than they were in 2007. Therefore, a given level of income will allow you to finance a much larger mortgage than in 2007. time. And with increasing competition among mortgage lenders, there is no reason to expect it to become more difficult for borrowers anytime soon.

And let’s not forget the good old government. House price surges can be increasingly problematic politically, but house price drops are rarely popular with anyone.

So I keep coming back to the same conclusion: the only thing that bursts this – and most other asset bubbles around the world – is inflation that rises to the point where it becomes too difficult for central banks to ignore it. And to be clear, by that I mean they reach a point where they need to do something to contain it and get ahead of the curve, rather than just gently raising interest rates to catch up.

It would involve tightening credit to the point where it hurts (which is why they won’t until they have to).

This may take some time. In the meantime, if you are a home buyer struggling with growing panic, my personal opinion is that trying to time the housing market is even more pointless than trying to time the stock market. In that regard, if you’re just buying a house to live in, here’s what really matters.


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