In June Bank of England (BoE) chief economist Andy Haldane said: “...the housing market in the UK is on fire”, a fact plain for all to see with the leading house price indices (Halifax and Nationwide) showing year-on-year increases exceeding 10 per cent (13.4 per cent at Nationwide) that same month. Taken with wider concerns about inflation, should we be worried that the housing market is a bubble? Not so according to the CEO of the UK’s third-largest house builder Taylor Wimpey (TW.) who stated in early August that we have an “entirely healthy and stable housing market”. That certainly feels like a bullish view to hold.
What is a bubble?
A housing market bubble is a surge in house prices fuelled by demand, speculation, central policy and loose lending. Housing bubbles usually start with a supply/demand imbalance which pushes asset prices to levels misaligned with historic norms. Here that means prices relative to incomes or mortgage payments against disposable income. While in this cycle the demand/supply imbalance, policy and loose lending are present, speculation is not unlike most previous runaway UK markets. Speculation in housing is primarily ‘buy-to-let’ investment but recent punitive tax treatment and low house price inflation have deterred investors.