Panic begins to grip UK housing market as the bubble popsPosted on 21 September 2010 with 23 comments from readers
UK house prices have fallen for three months in a row while in August UK mortgage lending dropped to a 10-year low of $15 billion. It looks as though the UK housing bubble is finally bursting after a massive double top in the market, the classic technical indicator of a coming big drop back to previous lows.
The UK banking crisis of late 2007 first brought a correction in UK house prices that had risen more of less continuously from 1993. But that 20 per cent dip in prices was followed by a rebound on the back of super low interest rates introduced to combat the global financial crisis in late 2008.
That pushed UK house prices back up. The problem is that this only made prices even more vulnerable, adding an obvious future rise in interest rates to a long list of potential hazards.
However, the real issue for the moment is back to 2007 and affordability. House prices have lost touch with the first time buyer market and are out of reach for those crucial first timers. In short, the house price to income multiple is far too high.
Indeed, the house price to income ratio is twice its long term average. For it to revert to this long term level requires either a doubling of salaries or a halving of house prices. It is not hard to see which option is the more likely in the current age of austerity.
But this is going to be a major shock to the UK national psyche. The bubble has been forming so long it has become accepted as a new reality. Few younger property owners remember the 1990-3 house price crash. Corrections can and do happen even in a market where supply is as tight as in the UK housing market.
Estate agents like to air brush over the early 90s. But there were people who bought flats at the top of the London market for $75,000 who sold them at the bottom for $42,000, just to give one real example from memory.
Will it be any different this time? Most likely it will be worse. In the early 90s the UK was less burdened by public debt and deficits. House prices also sold on lower income multiples and were more affordable then. John Major kept interest rates too high for too long, and made it worse. Bring on Mr Cameron and his austerity coalition this time.
Optimists will reply that prices will bounce back after a modest 10 per cent correction over a year or two. That is not how the charts look to any student of market economics. It would take an inflation like the 1970s to keep nominal house prices up and this just does not seem on the cards right now.
For expatriates with property this is clearly not good news. For those considering a purchase it means that waiting a few years is a very good idea indeed. Those with even longer memories might remember when the pound hit parity with the dollar in the 70s.
That would be the best moment for expatriates to buy UK property, with prices on the floor and the pound as well. How long does it take to get there? About two to three years.
You can even trace the inflation of this housing bubble right back to the early 70s. Have a look at these two graphs and compare the bubble model with UK house prices (the double top is missing from the second graph as it stops in 2008 but it is certainly there now in 2010):