Overvalued property in the UK is causing many experts to tussle with the idea that the UK housing market is in the grips of a ‘double bubble’. Global Strategist Albert Edwards, told UK newspaper the Telegraph the ‘bubble’ could pop within the next few years and cause another recession only 10 years after the most recent. The Societe Generale strategist commented on the government’s loose monetary policies that have not help deflate prices for those looking to buy, but instead increased prices.
“What you are doing is lending them more money backed by the taxpayer to push up house prices even more” Mr Edwards explained, while commenting that while US property prices corrected back to normal levels following the financial crisis, the UK market has become a “bubble on top of the previous bubble“. This is a theory that is agreed by the IMF who blamed incredibly low interest rates put in place after the recent crash that encouraged borrowing.
This declaration comes only one month after the UK reached its peak average house price in July 2018. The price of an average UK home reached £230,280 according to data from the Halifax Index. If the suggestions by Mr Edwards and the IMF that the UK housing market is overpriced by roughly 12% are believed to be true, this could wipe £30,000 off the average homeowners finances in the blink of an eye.
In July, the UK property market reached its peak and has increased the average value of a home by 50% over the last 10 years, an insanely high and unsustainable rate. The last few years however have been much slower than anticipated. The flattening nature of the housing market since early 2010 has been a worrying sign for forecasters that continue to murmur about the locked in nature of the UK housing market. In this situation renters remain stuck in their properties without the opportunity to move higher up the ladder, therefore these properties remain locked around the ‘forever renters’.
While the signs are disconcerting, the rate of increasing house prices should not be the only factor when considering the health of a market as Brian Murphy, a representative of the Mortgage Advice Bureau noted, the figures show a “consistent level of activity, and what today’s numbers do tell us, however, is that broadly speaking, the market remains steady despite the current economic and political headwinds, and certainly would suggest that the UK housing market remains resilient, with many consumers continuing with their personal plans in terms of moving home, regardless of what’s happening in the headlines.”
The Mortgage Advice Bureau’s approach of ignoring the individual regional results of the index relates to one particular section, London, where the majority of these worries fester. Due to the sheer size and scale of the London housing market, the entire UK market is unavoidably linked to its performances. Unfortunately, the poor performing trend of property prices has continued through the London luxury market, another strong indicator of economic performance and a huge provider of government earnings thanks to the eye-watering rates of stamp duty among others. A July report on luxury London property from a Mayfair estate agent found that sales of properties between £1 and £5 million have decreased by 50% since 2013. This has had the effect of lowering general property values but has meant for those trying to sell properties that the number of those on the market that are successfully sold, has risen. This sector of the market has also benefited from the uncertainty surrounding the UK housing market with property between £5 and £10 million, in increasing numbers from foreign buyers.
This increase in investments from foreign buyers is not purely a positive impact, with many experts speculating that it is a key contributor to rising rents and the difficult housing situation that the UK currently finds itself in. As the London market begins to perform poorly, it begins to drive investors further into the UK and the other large cities. It has also seen buyers change tactics with many snapping up low value properties with the intention of earning money through high quality rentals. this has a negative impact of moving more affordable housing from the current market increasing rents in the area by doing so and therefore increasing the problem that many so-called ‘forever renters’ not being able to purchase a new property to fit their needs or to save money while renting in order to advance.
While there are hundreds and thousands of contributing factors to the performance of the housing market, including many experts and government officials who will try to put in place policies and schemes to increase the performance of the market is it clear that if the and warnings from the IMF and Societe Generale are to be believed the fallout will be bigger than the UK has seen in the last century.