Deflating the UK's property bubble fears
Tue 17 Sep 2013
House prices in England have soared to a record high - sparking predictions that the country is facing another dangerous property bubble. Values in England are now 0.9pc higher than their previous peak in January 2008 before the boom of the New Labour years turned to bust.
The figures, published yesterday by the Office for National Statistics, are the latest sign that the economy is on the mend five years after the financial crisis struck. But they stoked concerns in some quarters that state-backed schemes to boost the supply of mortgages such as Funding for Lending and Help to Buy are inflating a new housing bubble. Business Secretary Vince Cable this week warned that we are heading for an 'old-fashioned property boom'.
Boom or not, George Osborne's flagship policy, dubbed 'Help to Buy votes' by some, certainly has its critics.Albert Edwards, head of the global strategy team at Societe Generale and a leading City commentator, has branded it 'a moronic policy that stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business'. But whatever the merits or otherwise of Help to Buy, the latest figures from the ONS suggest talk of a housing bubble is exaggerated.
'England is the only UK country where property prices are now higher than at their previous peak,' the report said. Prices in Northern Ireland, where unlike the rest of the UK there is no shortage of supply, are still 49pc below their peak of August 2007. In Scotland they are 6.6pc below the peak of June 2008, and prices in Wales are still 7.8pc below the peak of January 2008. The data also revealed huge regional differences in July with house prices across the UK 3.3pc higher than a year earlier and the average property now costing pounds sterling 245,000. Prices in Northern Ireland were 1.8pc higher than a year earlier but values in Wales were down 0.7pc and in Scotland they were down 2pc.
In England, house prices rose 3.7pc in the year to July, driven by a 9.7pc rise in London and a 2.6pc rise in the South East.
But excluding London, UK prices were up only 1.3pc and excluding London and the South East they were up just 0.8pc with prices down 0.7pc in the North West and 1.3pc in the North East. 'House price growth remains stable across most of the UK, although prices in London are increasing faster than the UK average,' said the ONS.
Scott Corfe, managing economist at the Centre for Economic and Business Research, said: 'There is much talk of a house price bubble at present but this seems an exaggeration and a very London-centric view of the UK housing market.'
Peter Rollings, chief executive of estate agent Marsh & Parsons, said: 'Any talk of a housing bubble is wide of the mark. 'Prices in most parts of the country are still well below the market highs, and the recovery in many parts of the UK is relatively muted. 'Ultimately, house prices can only increase at a rate that people can afford - so while wages remain low, and lending continues to be checked, there is a limit to how high house prices can rise.'
Bank of England figures show 60,624 mortgages were approved for house purchases in July - the highest level since March 2008 and up from a low of just over 26,000 in November 2008. But the mortgage lending remains well short of boom territory. More than 100,000 mortgages were approved every month for two years between August 2005 and August 2007 before the market crashed. It also remains difficult for buyers with small deposits to get mortgages - despite government support. Figures from Moneyfacts show the number of 95pc mortgage deals on offer has fallen to below 50 compared with nearly 1,000 before the crash. Northern Rock-style 125pc loans remain a thing of the past.
Danny Alexander, chief secretary to the Treasury, this week said 'we are a million miles away form a housing bubble in this country' as he hits back at Cable during the Lib Dem party conference. The chronic shortage of housing remains a major concern however and could force prices ever higher as demand builds.
Only around 100,000 new houses were built in 2010, down from a still unimpressive 175,000 in 2007. Developers say that the increase in demand for houses, on the back of schemes such as Help to Buy, means they will build more homes in the coming years. Barratt Developments last week announced plans to build 45,000 new homes in the next three years - 20pc more than in the previous three. 'We are building more houses which generates economic growth,' said chief executive Mark Clare.
But concerns about Help to Buy will not go away - and the Bank of England will discuss the risk of a bubble when its Financial Policy Committee meets today. The first part of the scheme, which started in April, offers government loans to buyers of new-build homes worth up to pounds sterling 600,000 who only have a 5pc deposit.
The second, far more controversial part, which starts in January, allows people with small deposits to buy an old or new home worth up to pounds sterling 600,000 with the help of a government guarantee on the mortgage. Critics argue the second part of the scheme should be scrapped, or at least modified so that it does not apply in London and the South East. Lowering the pounds sterling 600,000 threshold would also limit its use in the capital and reduce the risk of losses to the Government.
The threat of a new housing bubble has attracted the attention of Mark Carney, the Bank governor, who has promised to be 'vigilant'. But, speaking to MPs last week, he added: 'There are big pockets of the country where there has not been any meaningful recovery in the housing market.'