boom

The big question this year for people with an interest in property is 'are we in a housing boom or a housing bubble…?' Sellers, buyers, buy-to-let investors - they all want to know. But it isn't just those on the pitch that need to keep an eye on things, those in the stands do as well, as according to the office for National Statistics nearly 60% of the country's net worth is tied up in housing.

A housing bubble occurs when house prices climb to dizzying heights in a short space of time, rather than rising gradually with the rate of inflation. When the bubble bursts, house prices fall and things get a bit rough. In a boom, the market grows steadily, correcting itself.

As we speak, house prices are currently rising all over the country and these rises look set to continue. People who were put off moving in 2009/10 when the property market was recovering from the downturn have decided now is the time to move which has increased competition for houses. Lots of first time buyers have also entered the market as a result of government incentive schemes like Help-to-Buy.

Yet prices can rise quickly without indicating that we are living in a housing bubble.

As economist Ben Chu explains, "The average house price is now around five times average earnings, while the historic average is a multiple of four. This means that UK house price to earnings ratios are above historic averages, which could, in theory, indicate that prices are out of line with economic fundamentals in a bubbly kind of way.

"Yet other factors suggest those economic fundamentals have shifted, making higher mortgage to earnings ratios sustainable. For instance, interest rates (with base rates presently held down at record lows of 0.5 per cent by the Bank of England) are also considerably lower than they were in the past. That means the public can service a higher level of debt with a given income. Furthermore, the supply of new housing is much more constricted than it was in the past, thanks to a toxic combination of local nimbyism and land-banking by construction firms. And aggregate demand is also higher, pushed up by more people opting to live alone. Population growth is also putting pressure on the existing stock of homes."

So despite what journalists might call a 'surge' in activity, a number of factors appear to be curbing the market. These include, of course, the way that banks and mortgage lenders are showing additional caution in their lending criteria, after new rules were brought in earlier this year.

"Lenders are still being more cautious and mortgage applications are being reviewed and assessed very thoroughly. Schemes like Help-to-Buy have brought more people to the table in terms of being able to get onto the housing ladder in the first place - and this has opened up lots of opportunities.  It also seems the prices won't continue to skyrocket in the majority of places, but will find their own levels," explains an expert from Estate-agent-today magazine.

"Changes to pension investments following the March 2014 budget announcement by the Chancellor are also starting to fuel housing demand. However, in essence, it is yet to be seen as to whether we are experiencing a boom or a bubble. Only time will tell, but what we can be sure of is that we are seeing a different and more cohesive approach from lenders who are taking more time and requesting more information from our clients to support their applications, ensuring affordability. We, like other agents in the marketplace, present the facts to our clients and discuss how any increases in interest rates might affect the amount they pay so that they are prepared for whatever the future might hold."

In conclusion, should interest rates remain low for the foreseeable future and as long as lenders continue to stay responsible we can realistically suggest that the housing market is experiencing a welcome boom.

(image: HammerinMan/FlickrCC)

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