Are we heading for a crash?
The average house now costs £151,467. This is 5.2 times the average salary. House prices are rising by 18.5 per cent a year while pay levels are rising by 3.6 per cent. Britain's current mortgage debt is running at £783,000,000,000.
By Philip Thornton, Economics Correspondent
03 April 2004
money.independent.co.uk
The average price of a house in Britain rose to more than £150,000 for the first time last month, as a fresh rise in values triggered renewed fears that Britain was in the grip of an unsustainable speculative housing boom.
Figures yesterday from Halifax, the UK's biggest mortgage lender, also showed that the value of a typical home rose by 2.2 per cent or £3,300 in March. If the rise continues, the cost of an average family home will increase by £39,600 this year, equivalent to an extra household post-tax salary of £28,065. The rise took the annual growth rate to 18.5 per cent, its highest since September and the fourth consecutive month that the annual inflation rate has increased. This will ring alarm bells at the Bank of England, which been insisting for some time that the housing market will stagnate within two years. Analysts believe the strength of this week's housing figures will force it to raise rates to engineer a slowdown.
Just two years ago, the market broke through £100,000 and house prices have doubled in less than five years. But analysts believe that, if anything, prices are likely to rise to even loftier heights within months. Yesterday's figures rounded off a week of data that can have left few people in any doubt that the housing market is in the grips of yet another price boom.
On Monday, the Bank of England said new mortgage lending rose at its fastest rate on record. On Wednesday, Nationwide building society said prices were rising at their fastest rate for 18 months, and on Thursday, the Bank said mortgage equity withdrawal (loans not used to buy a home) hit an all-time high last year.
The flurry of figures has led to the inevitable warnings that the UK is suffering from a speculative house price bubble that will end in a property crash as it did in the late 1980s. But the mortgage industry and many independent analysts believe that today's housing market has solid foundations.
Martin Ellis, chief economist at Halifax, said £150,000 was "just another landmark". He added: "We have seen this sharp rise in prices as the market has been underpinned by a combination of strong demand, full employment, falling unemployment and interest rates remaining low, and a supply side of the market that is still tight."
The latest figures from the Royal Institution of Chartered Surveyors showed the number of homes on the market was close to its all-time low. "There is a lot of interest from buyers and they are chasing after not many properties," Mr Ellis said. "That is contributing to the ongoing strength in house prices."
Experts say the boom has been an adjustment to a new world of low interest rates that has made high prices affordable, first in the South and then, as prices surged there, in regions where houses were still affordable. And property has offered better returns to investors worried about their retirement than low-rate bank accounts or a volatile stock market. There is a vigorous debate at the highest levels of the Bank of England over whether the price boom will end with a bang or a whimper. The governor, Mervyn King, and most of the Bank's monetary policy committee that sets interest rates, believe willingness to borrow large sums to buy a home is rational, given the economic backdrop.
But one deputy governor, the former banking regulator Sir Andrew Large, believes the boom could turn to bust unless interest rates are raised quickly, perhaps as soon as next week, to "jolt" consumers out of the borrowing binge.
Some commentators believe that present house values are unsustainable and the only question is when, not if, the market will crash.
Analysts such as the stockbroker Durlacher believe the record debt, combined with rising interest rates and declining rents, will trigger a 30 per cent price crash. It said the market has the "classic features" of a speculative bubble, pointing - admittedly tongue in cheek - to the fact that the number of property-related TV programmes has still not peaked.
And if any more evidence was needed of people's desire to get a share of the housing market, Newcastle building society yesterday launched a new account that offers a return directly linked to the Halifax house price index. |
