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THE INVESTOR
bubbletrouble
To combat the threat of another property bubble, measures
have been introduced to stem the rise in house prices. Here, we
assess their impact and ask what else could be done to create
a more sustainable housing market for the long term
More needs to be done
to balance supply
and demand
By Joanne Hart
analysis
housing
A
ccording to conventional
wisdom, there is little that
makes the average British
homeowner feel better than
rising property prices. So it
was no surprise that the government was
desperate to kick-start the housing market in
the latter days of the last recession. Back then,
the paramount concern was that the housing
market had been plunged into a prolonged
state of depression.
Three years on and the mood is very
different. In June, Bank of England governor
Mark Carney warned that the threat of a
property bubble was the ‘biggest risk’ to
economic recovery over the medium term.
To combat this looming possibility, the
Bank imposed extra affordability tests
on borrowers and said only 15% of new
mortgages could be offered at multiples of
more than 4.5 times income.
The Bank’s measures followed the
introduction inApril of the Mortgage
Market Review from the Financial Conduct
Authority, which changed affordability
criteria, forcing lenders to look not just
at would-be borrowers’ income but also
their expenditure.
Early signs suggest the moves are having
a tentative impact. Data from the Land
Registry showed that seven out of 10 UK
regions recorded falling house prices in
June; property website Rightmove said the
average asking price fell 0.8% in July, the
first nationwide monthly drop of 2014;
and the Royal Institution of Chartered
Surveyors’ July survey said the housing
market had ‘paused for breath’.
Bernard Clarke from the Council of
Mortgage Lenders thinks this will be the
new pattern.‘The combination of tighter
lending criteria and new affordability
tests mean that the upward cycle will be
relatively short-lived and it will plateau as
we move into 2015,’ he says.
Nationwide figures mask the fact that
there are huge regional variations.As
Nick Parsons, head of markets strategy at
National Australia Bank in London, explains:
‘Increasingly, there is no such thing as the
UK economy and there is no such thing as
the UK property market.There is London
and the South-East and there is the rest.’
Figures from the Land Registry bear this
out, showing that, while London prices
were rising at an annual rate of more than
16% last summer, the average national
increase was just 6.4%, while prices barely
moved in the North-East.
As the Council of Mortgage Lenders
explains:‘There is a wide gulf in house price
experiences since 2007. Prices at the end of
the first quarter of 2014 were 20% above
their previous peak in London but still 11%
below their peak in the North-West.’
Such an extraordinary discrepancy does
not just make it hard to talk about ‘national
averages’; it also poses a challenge for
policymakers.‘Much of the London housing
boom has been driven by overseas and cash
buyers.The Bank of England’s new lending
criteria will not affect them in the slightest,’
says George Buckley, chief UK economist at
Deutsche Bank.
He believes tax could be used to reduce
foreign demand for London property.
‘When foreign buyers use London
property purely as an investment, it creates
real problems for first-time buyers. But the
government is bringing in Capital Gains
Tax for overseas buyers from next April
