Are we Currently Floating Along in a Property Bubble?
The UK property market is continuing to grow in strength and is currently experiencing something of a boom, but how much longer can it last?
It is a well-known fact that the UK property sector has a particular likeness to bubbles, with the market growing and growing before getting overheated and bursting. At the moment there appears to an array of signs that the UK is swiftly heading towards a property bubble and no one quite seems to know what to do about it.
It is believed that these concerns are due to the recently reported rises in house prices and changes in pensions that will potentially encourage retirees to use their savings to dip into the buy to let market in order to fund their retirements. The well-documented worries of first-time buyers have been put at ease slightly by plans to introduce ‘buy to save’ ISAs for those looking to get onto the first step of the property ladder. This is particularly welcoming news as it is believed that more or more parents are wrapped up in worry about finding the money to assist their children in buying their first homes.
Martin Ellis, a Halifax housing economist, points out that it is simply a case of balancing supply and demand within the industry. Mr Ellis remarked: “Housing demand is being supported by a number of factors, including economic improvement, rising employment and low mortgage rates. At the same time supply remains very tight, with a general shortage of properties available for sale.”
One explanation for the current demand for housing in the UK could be due to financial crisis of 2008. Many property builders and developers were halted in their quests to expand their portfolios or increase the size of their premises due to the fact that lending was put on hold. It could be argued that this has led to investors and businesses seeking out good quality property to invest in, which has led to the cost of renting rise in the UK.
This was picked up upon by Alan Sippetts, Investment Director at Heartwood Investment Management, who commented: “All these years after the credit crunch where we’ve had rising values in fixed income, in equity and in physical property, we still don’t have enough of the right kind of quality sites and quality assets that the modestly growing UK economy is calling out for.”
Is this something that investors need to be concerned about? What are the consequences for home-owners and those currently renting property in the UK?
There are concerns in some quarters that we are currently wandering head-first into something of a housing bubble which could burst and have consequences for all of us. One of the first tell-tale signs of a housing bubble is when rents reach never-seen-before levels. It is, however, not clear whether the current high rent levels are due to a potential housing bubble or the lack of a correlation between employee’s wages and the cost of living.
However, this notion was touched upon and dismissed by Mr Sippets: “Because property prices appeared to be so overinflated in June 2007, I’d be surprised if we get back up to those levels in the cycle. Last year we were seeing capital values rise by 2.5-3% quarter on quarter, and in the opening three months of this year values grew 1.6%. So there has been a slowdown in growth but it certainly hasn’t come to a standstill”.
It is currently not entirely clear whether the UK property market is currently aimlessly floating in a bubble, or whether the market is actually showing signs of getting stronger and stronger. No matter what though, you can be assured that a wide variety of individuals will be keeping a close on eye on developments in the future.