United Kingdom: House prices continue upward trend amid bubble concerns
May 20, 2014
According to the Nationwide Building Society (NBS), home prices in the U.K. rose 1.2% over the previous month in April, marking the 16th consecutive rise. The figure was above both the revised 0.5% increase recorded in March (previously reported: +0.4% month-on-month) and market expectations of a 0.6% increase. On an annual basis, home prices rose 10.9% (March: +9.5% year-on-year), which was the strongest increase since June 2007. As a result, the average house price was GBP 183,577 (April 2013: GBP 165,586), marking the highest price level since November 2007.
According to the monthly NBS report, demand is likely to continue to push prices up in the near term as mortgage rates remain at all-time lows. The NBS also added that the increase in prices is, “outstripping income growth by a wide margin,” despite the fact that wage increases have recently outpaced inflation.
Parallel to the economic recovery in the UK, housing prices have sharply increased. This has spurred discussion about the emergence of a housing bubble. On 18 May, Bank of England Governor Mark Carney stated that the marked increase in housing prices and the subsequent impact on households’ private finances through increasing indebtedness constitutes, “the biggest risk to financial stability and therefore to the durability of the expansion.” Carney cited structural problems in the UK housing market, especially in London. According to Carney, expanding demand continues to constantly outpace the new stock of houses, which thus pushes prices up. This effect is adding to the credit expansion that followed the Bank’s quantitative easing program, which started in 2009 in order to favor the economic recovery. Moreover, on 19 March, the Chancellor of the Exchequer, George Osborne, announced the government’s intention to extend the Help to Buy scheme until 2020, which is seen by most analysts as an effect complementary to the increase in demand for houses. Against this backdrop, Carney warned that it is out of the Bank’s scope to alter housing supply and that, if needed, this task belongs to the government.
That said, according to data released by the Homes and Communities Agency (HCA), in the third quarter of 2013 (the last quarter for which data are available) 39,330 new houses were started. On a quarterly basis, this represents a 2.3% rise with respect to the 38,440 starts recorded in Q2. Q3’s results represent a 23.9% annual expansion, the largest since Q2 2010.