“An Englishman’s home is their castle”
The obsession with home-ownership, is a mere' aspiration for the majority, though it is becoming unachievable in some locations without the help of the bank of mum and dad. House prices vary significantly in the UK and even by street in the capital. A roof over a person’s head is a basic need, but homeownership provides stability and can be more cost effective than rent.
Today it was announced that UK mortgage approvals have risen to their highest in more than five years in July. Governor of the Bank of England Mark Carney has previously mentioned that it is something the MPC are monitoring to ensure stability in the wider market. In an interview released on the Daily Mail website earlier today, Carney said he is ‘personally’ ready to head off the risks of a housing bubble caused by low interest rates and the Government’s Help to Buy scheme.
House prices are driven by demand and the supply, in urban areas classic house building has left many areas relatively saturated with new developments primarily on brownfield land. The demand for housing is motivated by a multitude of factors; the local labour market, crime rates and desirability, school catchment areas, the socioeconomic makeup of the area, availability, all contributing to the price.
A home for many is the largest purchase that they will ever make, with the majority (up to 90% of the LTV) financed through a mortgage. Prior to the credit crunch it was possible to purchase a property with 100% and even 110% mortgages. This leveraging fuelled rapid increases in house prices, allowing some to get a foothold on the property ladder, that wouldn’t have been able to previously.
Following the credit crunch, banks needed to reduce their balance sheets and were left with a higher level of low delinquencies on their balance sheet. As uncertainty spread the housing market stalled and prices fell in many regions. The banks required larger deposits, and the mortgage requirements were enforced. (This led to some homeowners being left in negative equity)
House Prices in London
London is a very separate market to the rest of the UK. House prices in the south east, are significantly higher than the average across the other regions of the UK. London is densely populated, with limited new supply and high demand. The higher wages, combined with the necessity to enable labour to reach their jobs are factors for the high house prices. The external factors is the influx of foreign ownership, investment and migration. The demand has pushed rents higher to offer a strong yield and a time of record low interest rates.
It is reported that the average house in London has passed half a million pounds, and that 5/6 properties are subject to the 3% stamp duty threshold. There is a handful of properties across the capital which are sold for under one hundred thousand pounds, which is four times the national average salary.
When will the Bubble Burst?
Mortgage approvals and home sales are still below pre-Lehman levels. The governments FLS is an unneeded steroid for a market that has naturally picked up follow 5 years of stagnation. While interest rates are held at a record low of 0.5%, with Carney’s forward guidance that this could be the case till 2016, house prices are set to continue to increase for the foreseeable. To overturn this, there needs to be a change in policy to increase the release of land to provide a new supply of homes. The NIMBY affect stalls the development of many new developments creating a trickle supply of new homes that doesn’t meet the ever increasing demand.
Nationwide says average UK house prices rose by 0.6% in August 2013