December 12th, 2013
James Mitchell, professor of economic forecasting for Warwick Business School, has taken data held by Halifax Bank on national earnings and property prices to calculate the risks of a housing bubble developing across the UK. In particular, Mitchell has considered the London market in his research, where prices have considerably spiked over the past 12 months. His conclusions are that any fears of a bubble should not be swept aside just yet, as the figures suggest the emergence of a potentially negative effect on the market in many areas of the British Isles is a reality.
Mitchell has taken each area of the UK into consideration during his testing, and he has noted that while London has the highest average increase in property over 2013, this has also led to a 93 per cent probability that the market is currently in a bubble. Second to London is Wales, where an 83 per cent estimate has been made, followed closely by the north-west where he saw an 80% probability of rapid price rises.
Mitchell commented on the results to say that: “(The results) raise the risk, although not the certainty, that house prices will fall, although predicting the timing and manner of any fall is even harder than identifying the presence of a bubble. But a bubble it appears to be and we should all – householders, business people and policymakers alike – be alert to this risk.”
Mitchell’s research noted that the only areas of the UK not currently seeing such damaging climbs in property price are Scotland, Northern Island and the East of England. And he noted that: “Rising house prices are proving helpful in leading the UK out of its longest recession in living memory. But with house prices at such historically unaffordable levels there is a risk that when interest rates start to return to more normal levels, which they will if not next year then the year after, that the finances of both households and banks are stretched to breaking point.
“This raises the spectre of falling house prices, negative equity, bad assets on banks’ balance sheets and a return to the so-called Great Recession we have been so slowly emerging from.”
In addition to Mitchell’s own research, the property value search site, Zoopla, has released figures suggesting the average value in the UK has risen by £10,329 during 2013. Zoopla, like many other sites dedicated to the presentation of national sales price data, compiles sales values for property sold over a historic period. According to the sites data, the biggest increase in value over the year has come in Newcastle, with prices leaping by 10.1%, which does in fact contradict the much held belief that the capital holds the highest average rise over the past 12 months. Although there is not much of a difference between the figures, with the London average sitting at 10%, it is a clear reminder that the increase in house buying is a national, rather than a localised trend.
From Zoopla, Lawrence Hall said: "This year saw a host of new government initiatives that are now helping the property market to gain stability and set the foundations for a sustainable recovery. As a result, 2013 has witnessed property price growth across most of the country and particularly at the entry level of the market. With confidence in the market increasing, 2014 could see further price growth as transaction levels pick up, construction continues and more property comes to the market."
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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