Monday, 27 September 2021

A new UK housing bubble ‘unlikely’

THE chances of another housing market bubble in the UK are “extremely slim”, a leading economic forecaster has said.

THE chances of another housing market bubble in the UK are “extremely slim”, a leading economic forecaster has said.

The Ernst and Young ITEM Club, a non-governmental forecasting group, said the Government’s efforts to revive the mortgage market had been “well-timed” and would benefit most regions in England.

ITEM raised its estimate for GDP this year to 1.4 per cent from 1.1 per cent three months ago, thanks to the improved outlook for the housing market and associated rise in consumer confidence.

According to the group’s latest report, the Help to Buy mortgage guarantee scheme is likely to result in house prices rising by 3.5 per cent this year and by 6.6 per cent in 2014, but ITEM’s chief economic adviser Peter Spencer said fears that it could lead to another housing bubble were likely to prove unfounded.

He said: “Despite recent criticism of these initiatives, the chances of seeing another housing market bubble are extremely slim. House prices and transactions are only just recovering from the credit crunch and will be paltry in comparison to those of a decade ago.”

Michael Fiddes, head of residential sales at Strutt & Parker, said: “Most people believe that talk of a bubble is hyperbole, created by the media. What we really need to do is create a stable market where housing is affordable, and if we can get the supply and demand levels correct, then a free market will find its own level.”

The forecaster also found that household finances were “in much better shape” than previously, with debt-to-income ratios at a more sustainable level.

It predicts that short-term growth will continue to be fuelled by the consumer this year. Although disposable incomes have only increased by a modest 0.2 per cent, analysts expect consumer spending to grow by 1.6 per cent and by 1.9 per cent next year. It is predicted that this trend will help reduce saving ratios to 5.7 per cent, down from the 6.8 per cent recorded last year.

Stephanie McMahon, head of research at Strutt & Parker, said: “Although housing affordability appears to be improving, we must remain cognisant of the environment of low debt costs we are currently in. Wage inflation has been flat for a number of years and house purchase does remain out of reach for many — hence why we have seen such a marked increase in private rental households (79 per cent) throughout the first decade of this millennium.

“The Government’s plan is to extend access to the housing market by providing deposit guarantees targeted at homes up to £600,000 in value. However there are questions about the long-term consequences of the scheme. As today’s cheap debt becomes more expensive over the coming years with borrowing rates rising, as they will inevitably do, will those buyers still find their homes affordable? The key is ensuring that monthly budgets can meet future interest payments in the 75 per cent mortgage portion, and that people with stretched budgets are not lured in by currently depressed interest rates.”

According to the ITEM Club, which uses the Treasury’s economic model for its forecasts, the UK’s recovery is now firmly entrenched. But the group warned that there are still a number of challenges ahead.

Mr Spencer said: “The boost from the consumer has pushed the UK economy into a progressively higher orbit, but this now needs to be supplemented by a thrust from the engines of export and investment.”

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