UK Housing Boom - Is the Party Over?


33 ratings



Jay Lakhani

21 Jan, 2008

in Fundamental Analysis

Recently the IMF said that the UK’s property was overvalued and this could result in a spectacular slump. House prices in the US have slowed down considerably since 2005.

The UK avoided the Recession in 2001 when many countries went into deep recession. Post 9/11 the UK interest rates were at the lowest for many decades, this resulted in a boom in the UK housing market as the cost of mortgages was at its lowest. The low cost of borrowing also saw a boom in the buy to let market with many investors having a big portfolio of properties.

Not only was the UK government on a spending spree but also the UK consumer, due to the easy availability of credit. Currently the UK personal debt level has exceeded more than £1 trillion. It is expected that we could see a significant rise in insolvencies during 2008. The “time bomb” is ticking and could explode at any time; it could be triggered by any of the shocks to the economy. The Northern Rock fiasco was just the first such trigger, which resulted in savers withdrawing over £14 billion from the ailing Rock – no doubt the next 12 months we will witness more such triggers, which will dent overall consumer confidence. This could eventually lead to a big fall in the house prices.

Many “experts” feel that 2008 could see further rises in house prices, and some optimistic forecast has been put at over a 10% increase. Housing demand is influenced by the “feel good factor” resulting into the expectation that the house prices will continue to rise. Some of the reasons for a boom in house prices are;

  • Cheap mortgage rates post 9/11
  • Availability of easy credit
  • Speculation of ongoing price increases
  • Buy to let investors having large portfolio of properties
  • Amateur investors now joining the buy to let bandwagon

The worrying part is when amateur investors join the party; it’s likely that we may have seen the peak! One can see similarities with the technology stock boom of 2000. Many investors bought at the peak and after several years they have yet to recoup their losses.

The past year has seen many amateur investors venture into the buy to let market for the first time. This has meant that they have had to buy at the peak, with the mortgage rates almost doubling in the past 5 years.

Currently prices are being supported by the expectations that they will continue to rise, and when this increase fails to materialise the bubble could burst. The house price inflation has been at its fastest this decade as can be seen from the following graph; and since 1995 we have not seen a dip in prices, it has just gone up in one straight line!

In addition, there are other serious issues with the economy which could trigger a sharp correction, not only in house prices but also the stock market. Some of the disturbing triggers will be;

  • Lenders offering loans of up to 5 times multiples to salary, thus borrowers are overstretching themselves.
  • Increases in mortgage rates have yet to have an impact and often this takes time to react. The mortgage rates have nearly doubled since 2002.
  • Nearly 1 million Britons now own a second home, often as a buy to let investment. When the downturn in economy comes, panic is likely to set in amongst the buy to let investors, which would result in the market being flooded with house for sale.
  • The US sub-prime mortgage crisis also poses more risks for the UK's banking system. In the US the crisis has lead to plunging property prices, creating a loss of consumer confidence with billions of dollars in loss.
  • UK Job prospects are worsening, with many economist predicting unemployment to rise to 1.8 million+. The banking & financial sector has been a big driver for employment growth. Many firms in the housing market; this could result into deteriorating earnings and leading to staff cutbacks.
  • Consumer spending could see a slow down when faced with deteriorating economic and job conditions. Once again this would affect consumer spending, thus lower earnings.
  • Inflationary pressures are driven by high commodity prices, as demand from emerging economies like India and China continue to increase. This not only has an impact on the monetary policies like the interest rates but will have significant impact on earnings, which could lead to a big fall in stock market.

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Re: UK Housing Boom - Is the Party Over?

I live about 40 mins out of kings x by train and all the houses round here are getting snapped up pretty quickly, mostly by landlords wishing to rent them out (not a bad thing in my view, dont' see why everyone needs to own a house).

In the Times Today:

> Help to Buy isn’t building bubbles, says Bellway: The Boss of one of Britain’s biggest housebuilders has denied that the Help To Buy scheme is stoking up a house price bubble.

> Housing recovery gains momentum as buy-to-let lending rises to £5 billion: Buy-to-let lending topped £5 billion in the second quarter of the year, the highest since the financial crisis struck almost five years ago.

Aug 09, 2013

Member (161 posts)

Re: UK Housing Boom - Is the Party Over?

Ftb interest rates are artificially lowered from market rate as >25% is interest free for 3-5 years. When that piper has to be paid, if the economy and real wages haven't picked up I'm expecting to see more from the supply side.

think this talk if a crash is a nonsense though atm.

Aug 08, 2013

Member (4630 posts)

Re: UK Housing Boom - Is the Party Over?

How can there be any crash when the demand is outstripping supply and by a large amount ? Most of London is being bought up by foreign cash and this has the effect of moving the prices rises up out of London as well. It is easily possible now to commute to London in under 90 minutes and live over 150 miles away and people are doing it.

I agree that FTB cannot get on the ladder but that doesn't mean that those with equity in their property will suddenly decide to lower prices. In my view the only thing that will possibly cause a crash is an increase in interest rates. That is because so many people are on a knife edge with monthly costs and there has been no increase in salaries over the last few years that any increase in mortgage payments will send them over the edge.

It is also interesting to see that a significant number of people taking out payday loans are professionals such as doctors, lawyers, dentists, teachers etc and that in itself shows how fragile finances are for a very large section of the population.

I also doubt the Tories will win the next election as their vote will be split between UKIP and Tory which will kill all their marginal seats. Labour will win easily by default as a result of just that alone in my view unless something quite dramatic changes things.

100% agree ..............but look at the governments interventions from 2008-2011 when they told banks not to REPO...........or else

also the banks know they will then generate a Real collapse if this happens so will probably accept defaults vs putting unrealised losses on their balance sheets....for a few years anyway ....


Aug 08, 2013

Member (35263 posts)