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Panic begins to grip UK housing market as the bubble pops

Posted 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.

Too expensive

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.

New era?

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):

Posted on 21 September 2010 Categories: Global Economics

23 Comments posted by readers:

Comment by Jeff - 21 September 2010

Most mainstream commentators argue we are leaving the last stage in your “stage of a bubble” i.e. returning to the mean…couple years of stagnation then another boom as a result of continuing mass immigration, banking recovery and very restricted home building.

CEBR predicts 20% rises in house prices over next 2 years.

Government/central bank support is monumental: 0.5% rates, SLS, APS (QE), DWP lucrative Mortgage Benefits, moratorium on repossessions, builders bailout out (while they don’t build) etc etc

UK economy and banks all dependant on house prices..the only unknown is how much inflation will have to be created to erode the debt overhang.

Comment by Bill Simpson in Slidell, LA. - 21 September 2010

What happened in 1996? That is one huge change in slope? It looks like the housing bubble may have started in the UK and then spread to the USA and elsewhere? Was it creative financing? No down payments? What?
The USA Department of Labor just reported that unemployment INCREASED in 27 States. That is over half of them. That won’t help housing much.

Ed Note: 1996 was a strong rebound after three years of low interest rates, a delayed recovery. But then it really started to get out of control and the low interest rates came from the US really and an independent Bank of England.

Comment by Mustak Ibrahim - 22 September 2010

In 1996 the law in respect of Security of Tenure for residential properties changed, which improved the return for Buy to Let (BTL) investors, also banks started offering BTL Mortgages

Comment by The Complete Banker - 22 September 2010

Thought provoking. I agree with the main tenet of the piece that prices are in bubble territory. To precipitate a fall is not necessarily a bad thing. The UK should take a lesson from the Swiss Canton’s: for every residential unit sold to a foreigner three units must be sold to a local resident. This creates a foundation for the local community that the UK lacks. Want to tackle social ills? Start with a stable housing market. I am not sure about the 2-3 year prediction, that seems optimistic in my view. One thing I agree on, the market is not going up for a very long time.

The Complete Banker @

Comment by dave - 23 September 2010

There is nothing else as remotely understandable for the average well-off punter to invest in. Organic Chemistry based start-up research companies anyone?

Comment by Jack Wallhurst - 23 September 2010

“Optimists will reply that prices will bounce back after a modest 10 per cent correction over a year or two.”
Newsflash!! Prices already down 5 to 10% in most parts of England except Sth East.
I have cash waiting and really need to buy but refuse to pay (typically) double what the seller paid in 2002. Many hours spent trawling the Internet and watching prices of my target properties taking a monthly trim show that cracks are appearing. As mentioned the range since May this year is -5 to -10%.
I’m waiting for the monthly trim to become short back & sides and don’t think it’ll be more than a year.

Comment by joseph - 24 September 2010

At the moment there is only a slim chance of a crash in London.

a) do you think interest rates will rise in the short/medium term? I dont so this will support asset values
b) always follow the money. It is to be found in London. Do you think London is going to loose its place as the major financial capital. I dont So there will be work for all and salaries to be collected at he end of each month. Again this will support asset values.
c) Do you think London will stop the money laundering that goes through the City. I dont. Again supportive of property values.

Do I think property values will go down in nominal terms in sterling. No
Do I think property values will up in real terms in sterling. Yes

So get into gold. That is the bar to mearsure in British house values will rise or fall and against gold it will fall.

Ed Note: House prices will fall because all the factors supporting them are weakening. When things get too expensive they do not sell and the price comes down, simple as that. Nothing makes houses different in the UK.

Comment by Dr. Keith Anderson - 24 September 2010

Two things happened in the late 1990s: buy-to-let mortgages and the growth of residential mortgage-backed securities. Suddenly anyone with a pulse could get a mortgage. For BTL the mortgage could be arbitrarily large as long as the rent would pay the interest. The mortgage originators didn’t have to worry about the quality of the mortgagee as using RMBSs they could securitise the rubbish and pass on the risk.

Due to the UK’s Stalinist planning system, the availability of housing finance soared while the availability of new houses didn’t. The predictable results haven’t yet been unwound because the banks can borrow from the BoE at 0.5% overnight so still have access to unrealistically cheap funding. It will all only be exposed to the harsh light of reality when we get a realistic bank base rate.

Comment by Jack Parkinson - 24 September 2010

Jack Walhurst is correct no amount of media spin will support house prices that are being held up by smoke and mirrors as a smart money investor we anticipate huge falls in the North and Wales once lenders start to repossess in earnest. We have reports from agents selling one house a month! with many fall throughs due to lack of finance and buyers simply not prepared to pay silly figures based on 2001 to 2007 artificle price rises You just need to hold your nerve and look at earnings to house price indexes and remember the “bull” trap only exists for shrewd investors to get their money out and liquid in preparation for the real drop – and yes property really did drop by 50% just 12 to 15 years ago.

Comment by Matt - 24 September 2010


They can print as much money as they want to, all they are doing is creating another bubble in a different asset class (stocks and government debt this time).

One thing they cannot do is to push wages higher, which is the sort of inflation that is needed to truely “erode” debt.

Wages have fallen in nominal terms, and for a significant minority they have actually fallen in real terms.

Until we see wages increase, we won’t see any reversion to the mean in terms of house prices.

It will be interesting to see what happens when the BoE special liquidity scheme is removed at the end of this year, while VAT goes upto 20%.

Next year will be a tough year for UK PLC.

Comment by Henry - 24 September 2010

Thoughtful article and very much to the point.
The fear + capitulation stage in the UK is certainly starting now.
Will only get worse. Look at what is coming: massive cuts in public spending; relatively high probability of double-dip recession, or at least very tepid growth for several years; inflation pressures due to loose monetary policy which will inevitably lead to much higher interest rates (remember the Bank of England is actually now independent, and it’s main remit is inflation control); continuing tightening of credit & mortgage conditions from bank as they rebuild their balance sheets.
Basic economic laws have a tendency to re-assert themselves brutally when things have gotten way of of control, such as the UK residential housing market.
The so-called housing market recovery of late 2009/early 2010 was based on transaction volumes less than one third of average years: the bull trap scenario basically.
Brace yourselves for the next leg down!

Comment by Tim Ware - 24 September 2010

I am please to finally see some truth about the UK housing market, normally all we hear is VI spin about how prices only ever go up, which scares FTB’s into getting themselfs into huge debt.

FTB’s should be warned about the state of the UK market which see a fate much worse than the US because the bubble was even bigger.

Anybody who still pipes on about the country being overpopulated and mass imigration etc, try telling that to the Japanese who have seen property price deflation for well over a decade, Japan is so overpopulated people rent tiny coffin sized rooms to live in Tokyo, if that level of overpopulation has not kept prices up then nothing will.

And we have not yet seen the effects of massive unemployment, Interest Rate rises and the soon to be announced cuts in government spending.

To quote the last poster, Whoever the CIBR are, they are living in some kind of inverse parallel universe where plus means minus.

FTB’s in the UK need to be warned not to buy, they will be getting themselfs into a lifetime of debt and nagative equity.

When will we get some decent reporting of what is actually happening here in the UK ?

If we do see massive inflation that will only place even more downward pressure on prices because everything will be going up in price except wages. If the BoE are brave enough to keep rates low and allow massive inflation in order to devalue the defecit then who will suffer – everyone with massive food and fuel bills, let alone pay their mortgage capital + Interest.

Please can we see some honesty come out of the UK newspapers and TV, information which could actually help people not con them into a decade of debt and negative equity.

Comment by Geoff Fuller - 25 September 2010

R.E. Bill Simpson in Slidell, LA

The M3 money supply exploded. If you get a chart of M3 and a chart for UK house price inflation it would be difficult tell which was which if not labelled.

Comment by Jeff - 25 September 2010

I will bet against anyone who says there will be anything more than a 5% drop in nominal prices over the next 2 years.

The smart money loaded up with UK property in the bargain period – late 2008, early 2009 and many are well up now.

I now see plenty of chain free buyers in the market and happily purchasing at near peak prices, even on more expensive homes.

You see there is still more than enough money around to swallow up all the available homes in good areas. The government has ensured that hardly anyone will be forced to sell and with property taxes so cheap in the UK no one will dispose of a unused property when there is nowhere else to put the money.

It quite clear that protecting house prices is of higher priority than protecting Sterling for any UK government. Yes, German property is half the price but their banks, economy and the fortunes of their political leaders are not dependant on house prices as they are in the UK

Comment by Pat Murray - 25 September 2010

The party is over folks – let everyone get used to it, things are going to get very rough for those overleveraged in the property sector. Only thing is that those property whores, the estate agents and the other shadowy figures who manipulate the property market are still trying to talk the market up and giving those trying to sell totally unrealistic expectations regards their asking price – you just have to look at the property pullouts in all the local newspapers. Today’s buyers are too canny and well researched to fall for it though. See you at the bottom later on next year! There might be something the FTBs can afford then.

Comment by Gavin Norman - 25 September 2010

I agree with Tim Ware’s comments. Especially in relation to how we have been just ‘fobbed off’ by the media.
I don’t recall seeing property programmes on TV in the early 90’s when it was the right time to by property, only from 2002-2010 when it was the wrong time to buy property!
I don’t recall loads of share programs on TV when it was the right time to buy shares, only just before the dotcom bubble bursting, when it was clearly the wrong time to buy shares.
Over the last 5 years it has clearly been the right time to BUY gold, but the media has been telling us to SELL all our gold for cash now!
Why do fully mature adults & kids/teens all think that whatever the media promotes is ‘cool’! What on earth can possibly be ‘cool’ about being ripped-off!

Comment by Tim Ware - 25 September 2010


The bargain period will start around autumn 2013, peak 2015 and finish around 2017,

The ‘smart money’ offloaded in summer 2007.

People who sold in summer 2007 realised it was time to get out when cab drivers and dustmen started telling them how great it was to get into BTL.

Anybody who gets into the property game now is a mug.

UK is 2.5 years behind the US, so wait 2.5 years after the US starts to recover then fill yer boots, thats if your not bankrupt. Now is not the time. Maybe around 2017 but who knows…..

Comment by chome4 - 26 September 2010

“When will we get some decent reporting of what is actually happening here in the UK ?”

No time soon! People are too concerned with celebrity culture.

Didn’t Roman leaders, during the fall of their empire, give the public more entertainment and cheap food while all around them was crumbling?

Comment by Mike Wilson - 27 September 2010

A comment to all of you who thing interest rates will go up a lot in the medium term.

1) it would break the UK economy – so, no use to anyone
2) there is an idea about that savers somehow ‘deserve’ to get a decent, completely risk free return on their money, just for putting it in a bank

You have to think this through. Why should you get a risk free return of 5% on your money? It’s a great incentive just to stick your money in the bank and not invest in anything else. But if banks invest in businesses, it’s a big overhead for businesses if they have to pay say 10% interest rates on loans so the bank can take its slice and pay you 5% – RISK FREE – interest on your savings. Don’t forget the bank has overheads and makes losses on some loans. It takes risks, you don’t.

I think 2% interest on your savings is quite reasonable as risk free interest. If you want higher interest than this, you need to be prepared to put your money at risk.

Ed Note: No with inflation at present rates savers automatically lose money, that is not a good return.

Comment by Jeff - 28 September 2010

Mike, the point is if you don’t receive an interest rate which matches inflation, then the real value of your money decreases.

Say it’s 1970 and a pint of beer costs 20p, however I decide to put my 20p in a savings account to store my wealth and spend it later. In 2010, when the prices have risen 20x, the same beer is now £2.40. So if I’m a high rate taxpayer I would need an interest rate of over 10% pa just to break even in real terms… just to drink my pint of beer in 2010 rather than in 1970.

This fraud has now reached an extreme with the BoE forcing rates down to around 1000% below inflation. Of course one motive is clear, to help prop up overvalued asset prices by deterring liquidation i.e. make cash = trash.

Comment by Mervis - 24 October 2010

Mike Wilson – banks lend the money deposited several times over. They loan the same money multiple times so there 10% charge bags them maybe 100% return/ anum while they borrow it at under 1%.

The bankers are getting huge profits now because the BoE have kept rates at low levels that suggest we are at death doors.

They have bostered liquidty and reduced the value of sterling by almost 30% by printing money (QE) inflation is anywhere between 4 & 6%. Bank deposits are definitely not risk free, savers are being robbed blind.

If people do not save the banks will reduce lending further and more people will become entirely dependent on the state in later life.

Savers are necessary and saving is healthy, they should be encouraged not shat on from a great height.

Comment by cdc - 18 July 2011

I read with interest the ‘main stages in a bubble’ model. I think we’ve been through the first ‘return to normal’ prices in the blow off phase… that was about 18 months ago when prices rallied unexpectedly, now I beleive we are in the fear/capitulation phase. Whilst estate agents wanted us to beleive that we were ‘back on the up’ prices soon began falling again. Now we have many forces acting against the market;
Low economic growth – our economy was growing due in a large part to consumer spending and personal wealth, this being fuelled by growth in house prices, easy credit and 100%+ mortgages. That’s all gone away now.
Lack of credit – banks have been made to be more risk averse, only lending to those who can safely pay it back. Hence deposits required for mortgages and limits to loans available
Economic rebalancing – the economy is being ‘rebalanced’ toward manufactuing and away from reliance on consumer spending. As we do this, the wealth of the domestic consumer has less importance, we all therefore get comparatively poorer.
Too many properties comming up for sale – after the drought comes a return to the market by sellers. This pushes it into a buyers market, prices fall more quickly.
Money talks – cash buyers are now stepping into the market and dictating terms, whilst sellers resist, the ‘I have the cash ready to go’ statement is tempting more and more sellers into lowering prices to make a sale.

Comment by Richard De’Ayh - 21 January 2012

The amount of properties coming on the market at the upmarket range at prices of £500,000 to £5,000,000 plus seems to on the beginning of an exponential curve about to go vertical . If there really are that many people with that much money
then they will all get sold. It depends on how well heeled these sellers are in other words if they can wait they will find a buyer. There has been no property chain , few first buyers like in the 80’s . So its just the rich selling to the rich . I’ve never seen so many mansions for sale , so many luxury 2,3,4 bedroom flats for sale . Half of these luxury flats all look the same . Clinical ,empty and guess what every one of them “stunning “. It’s not much good either if a person can afford the mortgage then looses their financing capability or their job even .

Ed: That does sound like a rush to the exit!

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