Is the UK housing bubble about to burst?

House prices in the UK seem to be ever increasing in the past several months, with the pandemic and subsequent curfew policies leading to an up to 10% fall in GDP. This was the first fall of this magnitude in three centuries since the Great Frost of 1709. Despite such data, it is astonishing to know that the latest data shows that house prices have shot up at the fastest rate of 13.4% in a year in almost two decades. Houses in the UK have soared at 10% annually, prompting fears of a property bubble growing as pressure on the bank of England. The big question arises – Are we heading towards another housing bubble?

With the prevailing pandemic and the government-sanctioned working-from-home policies, there is an increased desirability of bricks and mortar, with experts claiming and firmly believing in an oncoming housing bubble that is likely to pop soon. Today, Nationwide Building Society data shows that the prices for houses have risen by 0.9% in November alone, almost double the figure anticipated by the City forecasts, registering about a 0.7% increase in October

With this data, November’s jump puts the yearly house price inflation at 10% and leaves prices at 15% higher than they were in March 2020 when the country announced its first lockdown. Estate professionals and agents state that the demand of houses has far outstripped supply, with the number of houses available for sale dwindling to an all-time low. Researchers have been saying that demand for property has remained very strong while the supply has hit a historic low, resulting in double-digit house prices. Currently, the average UK house costs about £252,687, and about £660,000, making homeownership a near-impossible feat for the majority of the aspiring owners.

While rising house prices is usually a sign of economic growth, there is an increasing concern that in the current circumstances are another inflationary risk. In addition, while consumer confidence stabilized in November of 2021, the economic sentiments still remain well below the levels witnessed during the summer. The cost of living is partly to blame for this sharp increase. Worse still, the inflation rate is still forecasted to increase further, probably towards 5% in the coming quarters.

On other news, the Bank of England is also currently under immense pressure to raise interest rates that will actively lower the inflation on consumer goods but will only serve to raise the mortgage expenses further. Also all the big banks have already retracted their cheapest mortgage deals (fixed-rate deals). Many economists are saying that the housing market now looks much similar to the 2007 housing bubble model, just before the market bubble blew and caused the 2008 financial crush.

The optimistic lot believes that the current economic boom is driven by unusual pandemic circumstances instead of a more systematic issue with the economy. Several homeowners have spent much time at home and have had a growing desire for a better environment and more space. Thus, they have opted to move to rural areas for resettlement, leading to a hike in rural housing and recording a whooping 14% price increase compared to the city prices of 7%-10%. Furthermore, the government’s move to drop stamp duty tax has dramatically increased the demand for house purchases during late June 2020, explaining why the recent growth rate hikes as people were scrambling to complete purchases. As a result, once this comes to an end, housing prices are likely to flatten for several months, providing a slight reduction in recent prices, and reflecting the current need to expand ones living space and structural changes to individuals’ working schedules.

Furthermore, the pessimistic approach to the current situation claims that stamp duty will prompt a massive credit lending on mortgage, catalysing the housing bubble that is sure to send ripples throughout the housing system. Mortgage rates rates have grown to record high rates and have expanded from -£280m in April 2020 during the onset of the first lockdown, and seen record highs ever of £11bn by March this year. The Bank of England’s expanded quantitative easing programme coupled with the ultra lowered interest rates have only worked to catalyse this credit binge. The best approach for aspring homeowners is to wait it out until its safer to invest.

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