The reignition of the UK housing market, led by London, has been a key factor behind the rapid recovery seen in the UK over the past year. Not only has it fuelled a renaissance in the UK’s recession-ravaged construction sector, boosting GDP growth directly, but it has also helped sustain, via confidence and wealth effects, what has been a surprisingly robust recovery in private consumption. But while this has fuelled a great deal of angst about a UK housing market bubble, as we point out in a special report on the UK’s housing market, a look at the data reveals that to be largely a function of London-based commentators reflecting their own experiences. It is definitely not the experience of the vast majority of the country. Look beyond Greater London and there are few if any signs of a housing market bubble – quite the opposite in fact. Prices outside of London remain below their pre-crisis peak, while mortgage approval and net lending numbers, while on the rise, are still at levels last seen in the mid-1990s.
Indeed, we conclude that there are sound reasons to believe that the sustainable level of house prices should now be above its historical average:
- The secular decline in interest rates, and the expected persistence of below-average interest rates into the medium-term, means that households are able to afford to service larger mortgages relative to their incomes than in the past;
- Expectations of persistently lower interest rates have made the yields available on property more attractive relative to fixed income assets in particular, and;
- Longer life expectancy, and hence working lives, also support larger mortgages over longer terms.
Of course, prices in London look very expensive. But there are additional reasons why prices in London should have risen significantly faster, and are sustainably higher, than in the rest of the country:
- London’s population growth over recent years has significantly outstripped the increase in the supply of dwellings, something that is likely to remain the case, with the population forecast to expand by more than half a million between now and 2019, to 9mn, and;
- The transformation of London property into a global reserve currency on the back of the march of globalisation, in particular the rise of emerging markets, and the global search for yield.
So, for all of the hand-wringing about the UK housing market, the statistics just do not bear witness, outside of London at least, to anything approaching a bubble. Given that, the MPC has rightly shown no interest in reacting to what’s going on in London’s property market. And even if it did feel that action was required, that action will come from the Financial Policy Committee (FPC) in the form of macroprudential measures, not via rate increases. For the MPC, its focus is on what’s happening in the broader economy. Bank Rate will likely rise in the next year or so. But it will be developments in the labour market, not the housing market, which will determine when, and by how much.
For our full analysis, please click here.