The ITEM Club think so…

UK housing: no bubble to burst… except in London

The return of house price inflation has raised concerns over the risk of a renewed housing bubble. The good news is that, across the vast majority of the UK, there are no signs of bubble conditions emerging. Prices in most regions are below previous peaks in cash and real terms. Both affordability and household debt levels look much better than before the financial crisis. The exception is London, where limited supply and strong demand have driven price-to-income ratios and income multiples back to previous highs, signalling the potential for overheating.

Over the next five years, a combination of improving economic conditions, rising employment and support from Help to Buy should ensure continued growth in demand and transactions UK-wide. But increased supply from house-builders should help to keep a lid on prices helping to constrain price growth and we expect UK house prices to rise by an average of 6.5% annually over the next five years.

However, this national figure masks stark regional differences, with London and the other southern regions pulling away due to combination of stronger employment and income growth and a more limited expansion of supply. By 2018 the average price in London will be over three times that in Northern Ireland and the North East.

The conundrum for policymakers may be how to dampen London’s price pressures without choking off the recovery elsewhere. Changing the terms of Help to Buy is not the answer; we think that they should police income multiples in London while letting the market rule in other regions.

Peter Spencer, Chief Economic Adviser to the EY ITEM Club

Well definitely high rises in London, mainly from huge amounts of foreign investors. It’s only bubble though if it bursts, which it may do.

Having bought a london house 18 months ago and currently seeing £35k equity in it already, I’m not surprised it may be a bubble.

However, by the time the kids move out in 15yrs, we’ll have made enough even if it bursts to enable us to move outside the M25 and retire in the evenings relative comfort after coming home from work at the age of 80.

Its about the long term, unless your in it to attempt to make a fast buck who cares if the bubble bursts in the short term.

London house price to earnings is closing in on all-time high (since 83)
Affordability (mortgage repayment / income) still well below average though

In a nutshell……

after coming home from work at the age of 80.

Early retirement then!

Here’s hoping footflaps…

Colleagues at work are talking about maxing out what they can borrow, then getting parents to re-mortgage their house to provide money, and paying off that debt as well.

Not sure how a earnings-multiple limit would stop that?

My view: Not quite a bubble. Any adjustment will be a long flat period as per the last big price adjustment around the turn of the century,

Forg the PE limit and worry more if it goes back to the average

Assume ave earnings of 100k
Ditto CAGR in earnings next ten years of 3%
Current PE is 6.2x
Average house prince based on above is 620k

If the PE of housing went up to 6.4x then the average piece in 10 years time would be 860k a rise of 38% or 3.3% compound
If PE returned to average in London of 4,6x, the price would be 618k a slight fall over 10 years

So this is the risk to the LT investment idea…….

People have been talking about a housing bubble in the SE/London for the last 20 odd years. I don’t think any government would let it happen eg the we currently have the Right to Buy scheme pumping billions in to keep house prices on the up.

I hope it doesn’t burst as all my money’s in it!
As djglover says, more likely to be a period of no price inflation than a crash.
the estate agents wouldnt let it happen. and buyers will continue to pay more and more because they want it to continue and to be part of it.

great point footflaps, no government can do anything to upset those middle of the road swing voters with everything to loose in a housing crash. Just means by the time they all shuffle on nobody will be able to afford to follow them.

Just means by the time they all shuffle on nobody will be able to afford to follow them.

From a political view, this is actually fine as the older generations tend to vote much more than the younger, so the financial landscape will continual to be squewed towards the wealthier older generation whilst the younger generation fail to turn up at the ballot boxes…

we currently have the Right to Buy scheme pumping billions in to keep house prices on the up.

Hmm well that’s keeping the momentum for now. The main issue is demand outstripping supply by some margin, whilst there are people with enough capital or high enough incomes then prices can be sustained but sooner or later interest rates will rise then we’ll see where we are. Too high risk for me, moved out and will never return – but then I’ve already benefited from the previous rises and want an easy life now.

sooner or later interest rates will rise then we’ll see where we are.

All depends on whether we get a real recovery, rather than the subsidised well off being lent cheap money to pretend everything is ok….

The government will try to push prices even higher…why? They have personal interests and are benefiting substantial from the rise in property prices in London. When interest rates rise by twice as.much as they are (and it will happen in the next ten years) unfortunately a lot of people with loose their house, the price tumble will begin but the rich will have sold on and moved into other investments by then leaving the public to pick up the pieces as always.

The banks reposess on the cheap and make a killing, so all the rich stay rich and everyone’s happy. Unless you happen to be poor or middle class in which case you get completely **** over. I believe that is the plan anyhow.

rich foreigners will allways need somewhere to stash their money and london property is a hot tip

Im sure it cant last forever but as said above the government will do its damndest to make sure it doesnt burst on their watch

either way is skews the market, makes the rich richer and life tougher for those nearer the bottom and gives MPs a lucrative income stream when they flip/rent out their (second) homes

I currently rent and will be for a few years yet I should think. Looking at this help to buy scheme seems madness to me and as far as I can tell it’s helping to fuel the increase in house prices by enabling demand while supply is still too low. Houses in my street are all going for over asking price within weeks. (Surrey)

Presumably after 5 years the government loan will need to be paid back in addition to the mortgage. Are these people supposed to be saving during this initial 5 years to pay it off or are they hoping that in 5 years time they will be earning more and be able to stand the increase in repayments? In addition to this the inevitable increase in interest rates is going to further push repayments up.

I can’t see this happening in a lot of cases so I am guessing that in 5 years time there are going to be a fair amount of repossessions. My thinking then is that there might be some houses for sale that I will be able to afford. (Currently saving for a business that hopefully will enable us to save for a house…) If the bank owns them do they use an agent in a similar way to a private sale?

footflaps sed: eg the we currently have the Right to Buy scheme pumping billions in to keep house prices on the up.

Do you mean the Help to Buy scheme? The Right to Buy is something different, allows council tenants to buy property they’ve been renting. Wasn’t Mark Carney calling for Help to Buy to end because it just exacerbated the problem?

In my opinion the Torys will do anything to prevent a devaluation of property prices on their watch. 2016 might be interesting.

Do you mean the Help to Buy scheme?

Yep, whatever the current guarantee scheme upto £600k is called.

In in the burbs of london and my house is supposedly valued way more than I ever thought it would be. I think there is a pretty unique housing climate here but the word bubble seems an exaggeration. I think the truth lies somewhere between bubble and ‘normal for london’. People into politics use these phrases to make points. So yes hugley expensive house prices, yes over priced, yes pushing people out but only over the rate market forces applies, if any bubble bursts its only going to drop prices a little. IMHO.

It’s only a bubble when it bursts….

London suburbs now yield c 4% on net rental returns, ok its down from c 5% so still attractive to investors. Strangely, that 4% is equal to the average rise in capital values over the last 10 years or so.

Combined return of c 8% on a fairly lumpy asset (c 250k each min) & a fairly safe haven, for me that’s a winner.

Imagine having to spread that sort of cash around the banks at 1.5% at best, & having to worry about 1 of them going bust on you.

Overheated yes, bubble I doubt it. Everything I see coming up for sale in my area goes pretty quickly.

London suburbs now yield c 4% on net rental returns, ok its down from c 5% so still attractive to investors. Strangely, that 4% is equal to the average rise in capital values over the last 10 years or so.

Combined return of c 8% on a fairly lumpy asset (c 250k each min) & a fairly safe haven, for me that’s a winner.

Wierdly, it’s almost the same rate as the North East. I had a conversation with my landlord/letting agent and they reckoned that house prices were stagnent and unlikely to rise much soon (and were never inflating at the same rate as the rest of the country even <2007). But rent’s were 7-8%. Sometimes much better at the lower end of the market. £350/month on £35,000 properties is 12% (but higher risk of them not paying at all)!