What will stop the housing bubble?

There have been concerns recently that the property market is unstable and that even though the UK is currently recovering from the recession if the government doesn’t do something soon we may see another market crash. To make matters worse, not all parts of the UK are seeing the same rise in property prices as others, meaning that it is becoming difficult to afford properties in London and the south east while markets in other areas of the country are still struggling.

However, we are also seeing conflicting news reports concerning the housing market, as while some believe that it will continue to inflate until it hits breaking point, others are claiming that it is already cooling down. For example, the Royal Institution of Chartered Surveyors (RICS) has recently published data which shows that the property market is starting to stabilise. They claim that since February 2013 the number of new inquiries from house hunters has fallen to a much slower pace and that the number of homes going on the market has decreased for the past five months in a row.

The UK’s largest surveyor e.surv has also recently published figures which would support the theory that the property market is slowing down, as they claim that house purchase loans have fallen to their lowest levels for the past eleven months. Discussing the market, RICS’ chief economist, Simon Rubinsohn, said: “What we are really seeing is some of the very strong upward momentum starting to come off the housing market, as a lack of supply, higher prices, more prudent lending measures and some of the talk from the Bank of England are creating a level of caution among sellers and buyers.

“The most visible indicators of this are the revised downwards price expectations for the next 12 months and the flatter picture regarding new buyer enquiries. In particular, we’re seeing the London market level off.” Meanwhile, Matthew Pointon, property economist at Capital Economics, said that demand from buyers is “beginning to lose steam … but that’s not to say the housing market is grinding to a halt. While the level of lending has dropped, there is no sign as yet that loan-to-income ratios are coming down from record highs.

“So while signs that the market is cooling could persuade the FPC to delay taking any action, we suspect they will act to at least stabilise loan-to-income ratios, probably by toughening up the interest-rate stress test.” Even though some industry experts are confident that the property market will soon stabilise, Business Secretary Vince Cable recently stated that more needs to be done in order to protect the property market for the future. He added that he was “appalled” that some lenders were offering up to five times people’s incomes and that in doing so they are bringing too much risk to the market.

He added: “It is crucially important that the banks don’t throw petrol on the fire, and traditionally most of us who been through housing booms in the past have recognised that a stable level is about three, three and a half times people’s income. This is the key area that the Bank of England has now got to operate in, to make sure that this boom in house prices in the south of England doesn’t destabilise the whole economy. I don’t want anybody to suffer [but] we have got to make sure that the boom that is currently taking place in prices doesn’t get out of control.

“The problem is that the further prices go up, the fewer people can get into the market. And certainly in the parts of London I represent we are getting families on middle income who can’t dream of getting a house under the present conditions, and so the market does need to be stabilised.” Landlords who are currently concerned over the state of the property market will be pleased to hear that even if it isn’t doesn’t start to naturally stabilise soon the banks are being given more power to reduce lending. This means that their businesses won’t have to cope with fluctuating markets and they will be able to cover outgoings such as letting agents fees, landlord insurance and deposit protection schemes.

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