Don't freak out: stats show Britain is NOT in a housing bubble
Soaring UK house prices are not an omen that Britain is in a housing bubble.
Some people think the 56% surge in property prices over the last decade is an indicator that these massive highs will be followed by a massive crash.
But there are many factors indicating Britain’s property market is NOT teetering on the brink of collapse.
House prices are stabilising
Average UK property prices, according to the Office for National Statistics latest data, stand at £271,000 as of November 2014.
This is the same from the previous month, and only £1,000 down from July 2014.
Look how the markets are becoming more stable:
The Royal Institution of Chartered Surveyors’ (RICS) Residential Market Survey showed that UK house prices in January rose at their slowest annual pace since May 2013.
Halifax data also revealed that British house price growth should slow in 2015.
“When we talk about house prices going down, we have to be careful about what we are saying about the trend,” said Simon Rubinsohn, chief economist at RICS to Business Insider.
“If you look at the level at where prices are at, the UK housing market is actually stabilising.”
He added that average house price declines of £1,000 or £2,000 over a month, isn’t exactly a mark of a downwards sloping trend.
“Those headline numbers can mask what is happening across many regions,” added Rubinsohn.
RICS survey showed that 49% more London surveyors saw prices fall in January 2015 and for the fifth consecutive month.
However the new land and buildings transaction tax (LBTT) boosted Scottish buyer interest while Northern Ireland’s housing market “witnessed the strongest price momentum for the fifth consecutive month.”
“I would be reluctant to report an overall decline in place as there are certain places that show that this is not the case. It’s not just all about London,” said Rubinsohn.
“Our longer term indicators show a stable and positive picture for house prices.”
Help to Buy is only a small portion of the market
While it helped73,000 households buy a property in the UK, this accounted for only a very small portion of the overall housing market.
Halifax data showed that just first-time buyers alone bought 326,500 properties in 2014 overall.
“Help to Buy is a small, not massive, driver to rising house prices in the UK,” said Rubinsohn. “It actually had a positive effect, psychologically, on homebuyers and has boosted sales in areas that needed stimulus, such as up North.”
Out of the latest government figures, for November 2014, 83% of the Help to Buy recipients were first-time buyers and 94% of those sales were made outside London.
Leeds, Milton Keynes, Peterborough, Birmingham and Bedford benefited the most.
People can afford more
In the US, subprime mortgage lending meant "NINJAs" (no income, no jobs or assets) could get a home by borrowing from the bank. That was a market bomb waiting to detonate.
And it did, in 2007 and 2008.
Over the last two years, critics argued that the Help to Buy Scheme was blowing a housing bubble of similar magnitude.
They say that by allowing those who are in low-paid jobs to get on the housing ladder and take on a large mortgage, creates the risk that any interest rate rise will cause a default in payments.
However, people can actually afford more at the moment: The unemployment rate is only at 5.8%, according to the ONS. Average earnings excluding bonuses were up 1.8% from a year earlier too.
Elsewhere, the UK Job Market Report from Adzuna.co.uk showed advertised wages grew 6.9% in 2014, from the previous year, at £34,548.
“I think speak more broadly for the bank that we continue to monitor the developments in household balance sheets and when view risks, we look at it through [that] lens,” he said at theinflation report press briefing.
“I would observe that there has been an improvement and still remains above the longer term average. Savings growth in wages and lower inflation in the near term is fairly robust.”
Rubinsohn says that the Help to Buy scheme would actually support homeowners if interest rates rise from record lows of 0.5%, because they would only make payments on 75% of a mortgage. This is opposed to the standard 90% mortgage non-Help to Buy recipients would make.
Furthermore, those on Help to Buy tend to buy houses at a lot cheaper price than the national average. Latest ONS figures showed Help to Buy households bought properties for an average of £212,000, which is £50,000 below the UK average.
For the whole British housing market, the picture is rosy.
According to latest data from the Council of Mortgage Lenders, the number of home repossessions fell by 26% in 2014, to 21,000. This is at the lowest level since before the credit crisis.
Lending is more restricted than before
Mortgage providers restricted lending in later 2014 as regulators applied affordability checks to applicants, in the event of a rise in interest rates. The BoE also capped mortgage lending on 1 October last year.
This has meant that more risky borrowers would be prevented from getting a mortgage should interest rates rise to around 2%.
Britain’s housing market is already impacted by these measures. In November last year, mortgage approvals fell to a 17 month low.
House builders won’t saturate the market
Britain’s housebuilding is at its highest level since 2007 and RICS said that this level will increase in 2015.
However, experts said that construction will dramatically shift the house price balance.
“House builders have a lot of stimulus and Britain needs more properties but there are a couple of factors" as to why it won’t push down prices in the short to medium term, said Rubinsohn.
So, what's going to happen to house prices overall? "The data points to prices stabilising but it does not mean there is going to be a significant drop," said Rubinsohn.
"People focus too much on London prices. It is a not a bad thing stimulating the market, especially in non-London areas. Banks are a lot more judicious from before and affordability checks will help strip major risks to the market."