Are we heading for another property bubble?

Nia Williams

April 21, 2015

Tony Ward is president and CEO of Clayton Euro Risk


I was asked the other day, should we be worried about UK house prices rising again? Will it create another property bubble and what would be the implications of this?

Well the International Monetary Fund (IMF) certainly thinks so.

It warned last week that ‘containing financial stability risks from housing and mortgage markets remains important’ in the UK. 

Furthermore, the Office for Budget Responsibility (OBR) expects house prices to rise by 30% by 2020. 

This is almost twice as fast as wages, which is a frightening scenario if proved correct.

And to pay for these expensive houses, the OBR predicts that household debt will hit a new record high of 1.7 times incomes by the second half of 2019.

Some financial commentators are certainly worried about the borrowing that fuels and follows house price increases and what that means.

The IMF is concerned enough that it fears that the industry will not be able to self- regulate with setting loan to income limits but that interest rates may need to rise. 

However, then we get the EY Item Club suggesting an alternative scenario. The Item Club said that Britain’s recovery was entrenched and suggested that cheap oil and stronger pay growth would pave the way for the biggest rise in disposable incomes for 20 years. 

Peter Spencer, Item’s chief economic adviser, said: ‘Consumers are definitely in the driving seat of the UK economy at the moment with employment picking up and amplified by low prices. Unlike the OBR, we see little prospect of a credit-fuelled binge with the household debt to income ratio set to remain stable’.

So where does that leave us?

I believe that currently there is no cause to panic about an increase in house prices but we should be vigilant and tackle issues in the industry that may be keeping prices artificially elevated.

This could be, for example, an over reliance on forbearance.

Our greatest concern, however, should be that demand is far outstripping supply. As outlined at the CML lunch last week, and by the IMF, supply of a decent level of new homes is key.

That is where the issue really lies.

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