Beware of the property bubble – which way is the housing market really heading?

The importance of the housing market to the British economy, both as an indicator of economic health and a means of economic stimulus, cannot be underestimated. Since the beginning of the current economic crisis, which had some roots in the housing market but also had a drastic affect on that same market, much has been made of the importance of ensuring a swift recovery. So, where exactly is the housing market heading, will the recent rise in prices continue and are we just heading for another bubble that, eventually, is bound to burst?


Taking a look at the history of house prices in the UK highlights just how unique the region was in terms of continued rises in the market and a tendency towards over-valuation. While most developed countries witnessed great increases in house prices at the turn of the millennium, the UK experienced this a number of years before – recording the fastest increase of prices of any country in the Eurozone apart from Spain. Though the economic crisis caused prices to drop for a period of time, they seemed to have leveled out and unaffordable housing, for a variety of reasons, continues to be a problem throughout the United Kingdom.


Reviewing the figures


Recent figures released by the Organisation for Economic Co-operation and Development (OECD) show that house prices in Britain are overvalued by 31% in comparison with rents and 21% in comparison with incomes. This has been accompanied by news that house sale figures are back on the rise, hitting their highest level in just over three years. With this in mind, it is important to consider that experts also expect housing prices to reach, and surpass, the pre-crisis peak in 2014. All of this information points towards a housing market that appears healthy, though grossly unaffordable for the majority of British citizens, but can it help us predict the direction which the market will take in the future?


One way of determining the answer to such a question is by looking at trends across the entire region, taking other Eurozone nations into consideration. Figures seem to show that the vast majority of developed countries in Europe, including those still in the midst of a severe property crisis, are maintaining overpriced housing markets and that prices are continuing to rise. This suggests that any future rises or falls in the British housing market will be replicated across the Eurozone but, unfortunately, isn’t able to tell us what will happen.


If we take a look at movement in the housing market on a regional level, it appears that certain areas are propping up average prices across the country. By far the biggest of these is the London property market, which has seen prices grow at an enormous rate. This can be attributed to both the influx of wealthy foreign investors purchasing housing that is deemed a ‘safe’ investment (such as the Battersea Power Station development) and suburban London prices also shooting up.


Looking at London


The average price for a home in prime central London is now £1.4m, while prices in Camden, Hackney and Fulham are up 10-12% on this time last year. Elsewhere in the country, the housing market continues to struggle with prices up on this time last year, but seeing a small decline over the New Year period. Outside of London, there is a certain amount of uncertainty keeping both buyers and sellers cautious and lending the market a certain sense of unpredictability. LPA receivers, amongst others, will be keen monitors of the situation.


However, it’s important to remember that the current economic context will always create an unstable, uncertain and unpredictable housing market. This will be further exaggerated if, as it appears is happening now, high housing prices in certain regions suggest that there definitely is still a bubble ready to burst. Though many analysts predict house prices will continue to stabilise in most regions and rise in others, the effects of the Eurozone crisis and a worldwide recession are still to be played out. Ignoring these factors, and the extent to which the economy is tied in with Europe’s fortunes, would be a foolish move. In times of economic uncertainty the housing market usually experiences a period of cautious stagnation and true growth will not be expected until there are reassuring indicators of stability.


Finally, it is also worth mentioning the way in which the government has once again, faced by a term of no economic growth, gambled on the property market to act as a catalyst. With help-to-buy programmes being rolled out as a means to get the market kick-started, it is too soon to know the precise effects of such a move. However, such gambles are usually a sign of desperation and often don’t bode well for the chances of sustained and stable growth in an economy or housing market.


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