All the vital signs of the UK housing market indicate recovery, or at least a resurgence. There are more transactions, house prices have risen and more first time buyers have a foot on the housing ladder. The Monetary Policy Committee (MPC) acknowledges it, referring in the minutes of its 8 & 9 October meeting to a “revival in the housing market” with the fall in mortgage rates as a factor behind it.
It is against this backdrop that, in October, chancellor George Osborne brought forward the launch of his Help to Buy guarantee scheme, originally scheduled to begin in January 2014. The MPC suggests that Help to Buy is likely to “relax credit constraints for some would-be-borrowers” and effectively “support” the revival.
So what about critics’ suggestions the scheme could help to fuel a housing bubble?
More lending
It is true that mortgage lending in the UK is at its highest levels since 2008. Gross mortgage lending totalled £16.4bn in August 2013 and September’s figure is expected to be £16.2bn, bringing the total for Q3 to £49.3bn, up from £41.9bn in Q2 2013 and 32 per cent up from Q3 2012, when the figure was £37.4bn. However, there is still some way to go before the figures match the business transacted at the market height. It peaked in 2007 at £362bn for the whole year.
Rising house prices would probably be one of the most alarming indications of the start of any bubble and reports from Land Registry, Nationwide and others all indicate prices are moving upwards. Nationwide’s house price index shows that prices rose 5.8 per cent over the year to 31 October 2013.
However, a breakdown of the figures by region reveals that, while there are clearly some hotspots, predominantly in London and the South East, there are also some “cold spots” too, as highlighted in Table 1. In the year to 30 September 2013 house prices have risen
10 per cent in London, and 6.6 per cent in East Anglia. However, in the North they rose only 0.2 per cent and by 0.9 per cent in Northern Ireland.
Talk of a housing boom and bust is dismissed in government circles. In a recent speech, Charlie Bean, deputy BoE governor expressed confidence that a housing bubble is some way off. Bubbles are characterised by rising demand for a commodity, leading to a rise in prices. This in turn leads to speculation, fuelling more price rises, whereby people are willing to maximise borrowing to buy houses in expectation that the phenomenal rise in value will continue. The term itself denotes the lack of substance behind speculative price rises and inevitably once someone realises that the commodity is overpriced and sells, panic spreads, others try to sell and there is a drastic price correction.
While the UK housing market is experiencing revival, it is inaccurate to describe what is currently happening as a bubble. Surveys of would be buyers suggest most people simply want to own their own homes, rather than viewing housebuying as a way of making money. In fact, at the other end of the spectrum, some wonder how long this revival in the market is likely to be sustained. They fear that it could disappear virtually overnight with the end of government-sponsored schemes such as funding for lending and Help to Buy. Of course, the possibility that such schemes could contribute to a housing bubble in the future cannot be dismissed altogether.
Aspirations
In announcing Help to Buy 2, the chancellor once again unashamedly underlined his support for those with aspirations to become homeowners. He referred to “many hard-working households unable to get on the housing ladder or trapped in homes unsuited to their aspirations and needs”, especially first time buyers (FTBs). However, he also made it clear that while the scheme is designed to increase the availability of high loan-to-value mortgages, it is only for borrowers “able to afford the monthly repayments”.
With Mortgage Market Review changes due in April, lenders are not about to relax their lending criteria, and some mortgage brokers have reportedly complained that, despite Help to Buy, many clients are excluded from higher LTV deals due to strict criteria.
But while the chancellor has a clear vision of the aspiring homeowners he is looking to help, there is an interesting parallel with housing charity Shelter’s response to Help to Buy. Shelter refers to “working families priced out of affordable homes”, arguing that fewer than 10 per cent of suitable homes are affordable for a typical family hoping to get on the property ladder. It says that although Help to Buy aims to help working families, the scheme is probably out of financial reach for most. Its research suggests that FTBs would be unable to afford the scheme’s mortgage costs in over 80 per cent of the country. Its message is clear: the government needs to increase the supply of affordable homes, not the supply of credit.
