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Why the UK property market is overheated?

By Ron Szekely – Partner at CityR – US property investment specialists – Sep 3rd 2014

 

It’s no secret that UK property prices have exploded in the last year. Compared to relatively stagnant house price inflation between 2011 and 2013, London has seen house prices shoot up more than 20 per cent in the last year, with house prices on a national basis now expected to end the year 10 per cent higher than in January.

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However, research from Savills has forecast that London prices could flatline in 2016, after the huge growth in the market in the year to date. Further to this, the same piece of research has forecast the south east and other parts of the UK to outperform London in the next five years, with forecasts in excess of 25% growth.

 

These numbers sound impressive from an investment perspective, but there are an increasing number of warnings on the horizon for potential investors. Most startling of these, is the warning from the Governor of the Bank of England, when he announced earlier this year that the threat of a property bubble is the “biggest risk” to economic recovery, any investor in property can be forgiven for hearing alarm bells. The growing consensus it seems is no longer ‘if’, but ‘when’.

 

Added to this, regulatory changes including the Mortgage Market Review and Bank of England attempts to curb lending growth resulted July being the first month since December 2012 which saw no price growth in the capital.  Furthermore, estate agent Foxtons has warned that demand in the capital will slow in the second half of the year as a consequence, and prices will dampen accordingly into the autumn and winter.

 

But is a growing housing market surely not in the interests of policymakers, regulators, business and home owners? Well, to a certain degree, yes, as it demonstrates that the market is healthy and is more generally a good indicator of the broader economy.  The wealth of householders tends to increase with house price rises, which can lead to increase consumer spending. It’s also better than ‘normal’ inflation as it doesn’t reduce the value of savings, and it doesn’t necessarily mean that the economy is overheating, just that demand is outstripping supply.


The message that is coming through loud and clear, wherever you read about UK property, is that the near breakneck pace of price acceleration of the past 12-18 months cannot continue, both from a be allowed to continue for the sake of the housing market and economy as whole.

 

This concern stems from how such rapid price rises can fuel boom and bust economies, something all governments, central banks, regulators and the business community as a whole want to avoid. The credit crunch of 2007- 2008 was a prime example of how a credit bubble can burst, and policy makers will do anything to avoid that happening again.

 

The research mentioned above indicates that the measures taken by the Bank of England and the regulator have had the desired impact on the market, which will go some way to calming concerns over a bubble.

 

As a consequence, this means the best short term investment opportunities have now most probably passed UK property investors by. So, for those looking for returns from bricks and mortar, expanding your investment horizons is probably the wisest thing to do.

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