Why economists are arguing London property is not in a housing bubble
Rapidly rising house prices in London combined with very low interest rates of 0.5% during the past six years, have left many speculating when the property bubble will burst. However, there are numerous factors which suggest this is not going to happen, certainly nothing like it did in the crisis of 2008, as market conditions are very different today.
Back then the problem was billions of pounds of bad debt, from complex mortgage related derivatives on a global scale, affecting the home market. The type of loans available then no longer exist and loan-to-value ratios are not available at 100% anymore.
The Bank of England now has more stringent policies in place, to make sure that people who need mortgages, never get a loan that is bigger than 4.5 times the household’s salary.
“90% of people are getting fixed rate mortgages,” said Bernard Clarke from the Council of Mortgage Lenders.
In 2008, many homeowners had interest-only mortgages which left them still owing the full amount on their property.
Even if interest rates do rise, the Bank of England’s Governor Mark Carney has said the Central Bank would take “baby steps” in raising them. It is suggested that it would only be by 0.25% at a time, this would mean an additional £55 a month for every £100,000 owed.
It is far more likely that house prices will stabilise or grow at a much slower rate than they have been. The main factor being that wages have not risen at the same rate as house prices, particularly in London.
Less people are able to afford to get on the property ladder. In Britain’s capital, the median average salary is just £30,338, whereas the average price of buying a property in London is now at £522,000. This does not mean that there will be a shortage of buyers, as there is just not enough houses to go around, demand will always outstrip the supply.
The Confederation of British Industry announced last year that 240,000 properties needed to be built annually to accommodate demand in the UK.
Taking London as a whole, which is highly populated, with a steady influx of people wanting to work and live within its boundaries, it is unlikely to see prices coming down rapidly, if at all.
The Royal Institution of Chartered Surveyors said in its Residential Survey for October that UK prices are expected to rise by 4.5% per annum during the next five years, which would be a cumulative increase of approximately 25%. It is not considered advantageous for prices to come down, because banks would have to deal with more bad debts from previous mortgage lending and also credit availability would become difficult to obtain.