Opinion: Bursting the housing bubble
Published by Max Salsbury for 24dash.com in Housing and also in Finance
First-time buyer numbers 'hit new low'
By Peter Brown, chief executive of Herefordshire Housing.
With almost universal cries that help to buy is fuelling a housing bubble, the prime minister has announced that help to buy, phase 2, will be launched immediately. No doubt detailed calculations have been carried out to give the chancellor confidence and the PM the green light, after all, Mark Carney has said that he will “personally intervene” if the market overheats.
But with prices continuing to rise in London and the south east and mortgage lending rapidly increasing, can there really be any serious doubt that a bubble is developing? The truth is, the housing market in London and the south east is undoubtedly overheating. It’s also true there are more powerful financial influences at work; help to buy is making just a small contribution to house price inflation.
A series of events over the next 20 months is going to put severe pressure on the housing market. As a result, the housing bubble will probably burst in the summer of 2015, soon after the May 2015 general election.
US quantitative easing will be reduced. The Federal Reserve is reported to be planning to start tapering of QE in December this year. Not enough is known of the global effects of massive, sustained QE by the US supported by the UK and the European Central Bank.
We know that as QE is scaled back, interest rates will increase during 2014. Mortgages will become less affordable resulting in less housing transactions. QE dampens the value of the currency so helping exporters. Reducing QE will see the value of the currency increase. Foreign buyers - estimated at 38% of all new property purchases in London - will simply leave the London market for better value for money elsewhere.
Welfare cuts will start to bite with £1.21bn reduction by April 2014 and an additional £2.24bn by April 2015. Welfare recipients don’t buy properties, but they spend their income, supporting the economy. And reduced welfare spend is cumulative, affecting small and large businesses across the country. Finally, continued high unemployment will severely dent confidence and the ability to support a mortgage. Carney has made falling unemployment the trigger for raising interest rates.
It’s estimated that help to buy funds will be exhausted in 12 months and, after a short extension by government to the end of 2014, the inflationary effects will diminish during the first half of 2015.
These are powerful drivers. Acting in concert, they become unstoppable. National governments over estimate their influence over their economy and predictions are usually wrong. Economists forecasts invariably erroneous. Look to politics for the strongest indicators; and they point to London and south east property values heading for a dramatic fall during the summer of 2015.