Is the UK Property Market on the Bubble?

Numerous prognosticators of economic and property markets have recently been discussing ´Bubbles´.

But why now after 10 years of booming Credit, land and property values has it suddenly become a topic for dicussion?

Is it that no one saw this coming? Highly unlikely, even if the current journalists, professionals and experts didn´t experience the previous property bubbles of the late 80´s and early 70´s.

Looking at the chart here we can see one of the key factors for ´Bubble´ markets. The average earnings to house price ratio is usually a good indicator of when prices have gone above their natural high and are due for a ´Correction´. However this appears to have been ignored a few years ago.

1. Interest Rates - Obvious really. historically low interest rates have definately assisted the ´affordability in spite of the price´ thinking. Consider the housing market if interest rates returned to their 1989 levels of 15%?

2. City Bonuses - It has been well documented the City had been paying record salaries and bonuses over the past few years, giving a small number of investors large amounts of disposable income. Whilst accurate figures aren´t available, it´s fair to say a fair few ´Buy-To-Let´ properties are owned by City ´whizzkids´.

3. Pension Funds Collapse - Whilst only a few Pension funds actually went out of business, the confidence in them dissappeared without trace. This encouraged small investors to look at alternatives, one of which was property. The ´Safe as houses´ mentality certainly seems logical.

4. Migration - During the past 10 years, borders, in particular European, have been relaxed, the freedom of movement have brought millions of new citizens to the UK, particularly London. Historically, almost every society experiencing large scale migration has seen an uplift in economy. This has led to more demand for housing, particularly for rental property.

5. Right to Buy - Lauded in the 80´s as Margret Thatchers gift to the masses of council house tenants, giving them the opportunity to buy their council owned home at amazingly discounted prices. Great for the new home owner, though not so popular with many non-council tenants and home-owners. 20 years on, it seems like the Tories ´Sold the Farm´ for a few floating voters.

6. New Build Moratorium - Without Government housing available for the masses, it increases the demand on the private sector to provide housing for masses, but without the planning approvals for new property, supply has dwindled.

7. Social Affluence & Change - There has been a tremendous change in socially acceptable living, which had led to an increase in single occupier households, the freedom to live alone again increases the demand on housing leading to yet more demand.

8. Marital Status - With the relaxation of ´living-in-sin´ and ´Divorce´ no longer holding the stigma of the ´Old-fashioned values´, it appears to have affected property demand. Couples have started families, only to find out their partner was not the person of their dreams, subsequently one moves out the marital home increasing demand. Because of visitation rights, the second family home also needs to accomodate a family, further demand.

9. Bandwagon Thinking - Or it could be described as the ´Fear Factor´ even the ´Monkey See, Monkey Do´ factor. However you want to consider it, the fact that everyone else is doing it, which means it must be the right thing to do?

10. Loose Lending - Last but most definately NOT least is the change in Bank lending criteria. In times gone by, Buy-to-Let mortgages were only available to financially stable individuals at a maximum 75% LTV where income exceeded outgoings by 35%. However, things changed, Banks lending 85% LTV and requiring only 125% income/outgoing ratio, became the ´norm´. Laterly, some Banks became more adventuruos, criteria relaxed, some offering 90% LTV and 1 to 1 income to outgoing ratios. This enabled virtually any ´non-bankrupt´ individual to become a Buy-to-Let landlord, and many have.

It is estimated 20% of all UK mortgages are BTL. Consider how many landlords have regular mortgages on their BTL and how many are owned outright in cash? This might give us an idea of how exposed to a deflating property bubble the UK market is.

As always, your comments are welcome.

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Is the UK Property Market on the Bubble?