There is a 77 per cent probability that the UK is in the midst of a housing bubble, according to academic research with London at significantly more risk than other regions.
James Mitchell, professor of economic modelling and forecasting at Warwick Business School, carried out a regional assessment of the housing market in the UK and concluded that there is a clear risk that most regions are in the grip of house price bubbles.
Mitchell’s research uses house price and earnings data from the Halifax to calculate the probability that house prices in each region are higher than historically affordable values.
London has a 93 per cent probability of currently being in a housing bubble, followed by Wales at 83 per cent and the north-west at 80 per cent. The south-west and north-east share a 77 per cent probability and the West Midlands has a 72 per cent probability.
There is a 67 per cent chance Yorkshire is seeing a housing bubble, while the East Midlands and the south-east have 66 per cent and a 65 per cent probability respectively.
Only Northern Ireland, Scotland and, to a lesser degree, the East of England are less likely to be suffering a bubble.
Mitchell says: “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.
“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.”
Last month Jim Rehlaender, co-manager of the £827m Schroder Global Property Securities fund, told a conference in New York that he is sceptical on whether the Government and the Bank of England are doing enough to prevent UK house prices from rising to dangerous levels.
On Mark Carney, who became governor of the Bank earlier this year, Rehlaender said: “You now have the bubble man. I’m worried about the UK.”
Carney was governor of the Bank of Canada before joining the BoE. Some commentators have argued that Canada is also in grip of a housing bubble, with ‘Dr Doom’ economist Nouriel Roubini saying Canada, along with the UK, Australia, Germany, France and a host of other developed countries, are showing “signs of frothiness, if not outright bubbles”.
But Roubini added: “These new housing bubbles are not yet on the verge of bursting, as the forces feeding them – especially, easy money or the need to hedge against inflation – are still very strong.”
Rehlaender also criticised the UK Government’s Help to Buy scheme, which is designed to help first-time buyers onto the property ladder. “You didn’t need Help to Buy – you needed stuff to buy,” he argued.
Last month, Carney adjusted the Funding for Lending Scheme to mean from next year banks will no longer be able to access cheap finance for mortgage borrowing, in a bid to cool the housing market.
The Bank’s Financial Stability Report on 28 November also said the housing market shows “little evidence of an immediate threat to [financial] stability”.
However, it added that “risks may grow if stronger activity is accompanied by further substantial and rapid increases in house prices and a further build-up in household indebtedness”.