(Bloomberg) – The UK property market is heating up rapidly and a mix of rising demand and double-digit price growth gives cause for concern that an unsustainable bubble is forming.
The pace of mortgage approvals is more than a third faster than pre-pandemic levels, and housing construction could be heading for its busiest year since pre-financial crisis as buyers rush to take advantage of a tax cut. But with affordability tight and lenders easing mortgage requirements, the signs are starting to worry some Bank of England policymakers.
The government’s tax exemption is only temporary, which potentially creates a cliff and slows you down towards the end of the year, just as the employment promotion programs end. BOE Assistant Governors Jon Cunliffe and Dave Ramsden both said this week that they are “carefully” watching the property market amid boom conditions.
One risk is that banks will relax their lending restrictions due to the wave of demand. The Nationwide Building Society has started offering new mortgages that are 5.5 times the income of first time home buyers, above the commonly used 4.5 ratio. If others follow suit and tell regulators they need to adjust to the market, “we see some risk,” said Neal Hudson, founder of Residential Analysts.
Still, demand for the tax break phasing out could be supported in the coming months as the effects of the pandemic linger, particularly the work from home culture that has sparked the desire for larger homes further out of urban areas.
The following graphs show what happened in one of the most turbulent economic periods in modern history.
After more than a year of pandemic restrictions, home ownership looks intact. Chancellor Rishi Sunak’s stamp tax cut, which saved buyers up to £ 15,000 ($ 21,200), lit a fire under the market while other parts of the economy suffered.
The surge in demand can be seen in the mortgage and transaction numbers, both of which reached multi-year highs. Despite criticism that the stimulus was not needed, Sunak extended the benefit to October 2021, beyond the original March deadline.
In addition to the stamp tax effect, the pandemic has also triggered a change in lifestyle, and the desire for larger real estate is creating regional hotspots in the housing market.
This structural change is taking place on a global scale, with the UK being one of 13 countries to see double-digit house price growth over the past year, according to broker Knight Frank LLP.
This is causing authorities around the world to pull levers to curb rampant house price growth. Canada’s banking regulator has tightened mortgage loan requirements in the face of its own housing boom, and New Zealand’s central bank threatens to act.
Back in the UK, “there are some people who are worried about what’s going on with property prices outside of London,” said Marcus Dixon, director of research at LonRes, a property data company. “We don’t mind a little growth, but we don’t want a crash.”
The latest figures from the Nationwide Building Society predict price growth of nearly 11%. While this may be skewed due to the slump in activity during the UK’s initial lockdown a year earlier, the numbers are still on a rift. The data from the statistical office put the average growth in the first quarter at 9%.
The mini-boom is a problem for those who struggled to get on the real estate ladder before the pandemic. With most lenders asking for a down payment of one-fifth the price, the average amount new buyers put on a mortgage rose 23% in 2020, figures from Lloyds Banking Group show.
Affordability was already tight, especially in London. Critics of Sunak’s stamp tax cut say it contributed to the unequal impact of the pandemic on younger workers, a point noted by Cunliffe.
“It cannot be ignored that real estate booms can shift wealth towards existing, and generally older, homeowners and therefore increase inequality between generations,” he said last month.
The divergence between those who can afford it and those who cannot afford to buy a home goes to the heart of the Conservative Party’s efforts to get more people up the career ladder. Politics – “Generation Buy” – appeals to the typically British dream of owning a home as a milestone in life and the most important way to build up wealth.
But while many people accumulated savings during the pandemic because they could not go on vacation or eat out, it was not all the same. Young workers were disproportionate in industries hit hardest by lockdowns – like retail and restaurants – letting them come out of their pockets at a time when they might be trying to save up for a deposit.
The government has now introduced a 95 percent mortgage loan guarantee program. But other credit criteria do not always make it easy to get these loans. And for those who do, 5% doesn’t offer buyers a huge margin over negative equity when home values go down. The program also stimulates demand without doing anything for supply, which increases the risks.
The risk of falling prices is particularly pronounced in London, which has lagged other regions, and even within the city there have been large disparities in demand.
Districts with some of the most expensive houses in the country were counted because of people fleeing the city center, while neighborhoods on the outskirts were in high demand. However, there are signs that the wave of emigration is reversing as demand rises in cities across the country amid a rapid rollout of vaccinations.
As the UK hits a number of milestones in controlling the spread of Covid-19, threats to the economy remain. While the housing rally still has some time to go, the cancellation of the stamp tax will take place around the same time as the end of state employment subsidies. The latter could expose a weakness in the labor market and drive unemployment up.
“People’s experiences are extremely extreme,” says Yolande Barnes, real estate researcher at UCL. “If you have that in business now, you get that in the housing market.”
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