Partner Article

Don’t believe the housing bubble hype

Only a year ago, there were fears from some quarters of a ‘triple-dip’ recession. Fast forward a year and we’ve gone full circle to fears of a housing bubble. We believe these fears are overdone: we are a long way off a property boom.

It’s true that prices in some regions have become more stretched, but we don’t see any significant risk of a bubble. Indeed, we believe that house prices will rise steadily – at three or four times the rate of inflation in 2014 – as the economy recovers and interest rates stay low.

While UK house prices are above average on valuation measures, our measure of affordability suggests that gains of 6–7% are plausible over the coming year. The main driver remains the availability of cheap finance. And despite overvalued house prices, affordability has improved (given low interest rates) and we expect the Bank of England to keep rates at their record low level well into 2015.

A good measure of value is the ratio of house prices to nominal (including inflation) gross domestic product (GDP). Admittedly, prices on this measure have been above average since 2002, but at 6% above average they are not currently looking like they’re in a bubble. Mortgage applications are also still well below their pre-crisis levels.

This is why we expect the UK residential property market to rise and become less London-centric. Rising mortgage lending, low rates and a recovering economy will all help the domestic buyer.

There will also be a ‘ripple effect’ from record London prices driving buyers into adjoining areas. Price increases will remain focused on the upper end of most local markets, but the low levels of transactions suggest that talk of a property boom is short of the mark.

This was posted in Bdaily's Members' News section by Coutts & Co .