Bubble fears are not primary housing market concern

Kerry Craig

The housing market is firmly in the spotlight at the moment and dominating dinner table talk all over the UK. Almost regardless of what else may be happening in capital markets, the value of a person’s home is what matters most from a behavioural point of view.

A person’s home is often his largest asset and where his sense of wealth stems from, influencing financial decision-making. However, the recent rise in house prices has stoked fears of an asset bubble. Are these fears legitimate, or is bubble talk just a lot of hot air?


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The difficulty with asset price bubbles is that they are exceedingly hard to identify. Very loosely, a bubble is an extreme period of price inflation leading to an asset over-valuation and is usually generated on the back of a period of easy money.

On this basis, the UK housing market may look a little bubbly as prices have risen quickly and there is plenty of easy money about, thanks to the Bank of England. However, the true picture looks a little more complicated – compounded by the constant streams of house price data, each of which paints a slightly differing picture of the UK housing market.

House prices rose in the UK by 3.8 per cent year on year in September according to the Office of National Statistics, and 6.6 per cent according to the Halifax house price index. The headline ONS figure suggests that prices are now above pre-recession levels, but the other measures from Halifax and Nationwide suggest that prices are some way below their previous peak.

These headline numbers are distorted by London, though, and the underlying data makes it clear that any talk of a bubble is not a UK-wide phenomenon. House prices in London rose by 9.3 per cent over the year to September, but if London and the south east are excluded then average price rises are only 1.4 per cent higher.

Economists may argue that the government’s Help to Buy scheme is fuelling inflationary pressure in the housing market by increasing demand without the commensurate increase in supply. However, in the scheme’s first month, more than 75 per cent of applications came from outside London and the south east, suggesting that the scheme is not fuelling the London price rise or the headline numbers often seen in the press. This perhaps indicates that the scheme’s £600,000 cap on the house price is excluding many would-be homeowners in the capital.

There is also some evidence to suggest that the increase in house prices may not continue at the same pace, and that much of the expectation around the Help to Buy scheme may have already been factored into current prices.

The latest credit report from the Bank of England showed that mortgage approvals for new home purchases rose in September from 63,400 to 66,700; however, approvals are still far from the pre-recession peak of 129,000 in 2006. In addition, the speed of increase in approvals looks relatively modest compared to the surge in new buyer inquiries illustrated in the Royal Institute of Chartered Surveyors survey, while agreed sales, as measured by Rics, dipped in October.