UK property bubble to burst?

May 19, 2006 4:40 PM

Is the UK property market bubble ever likely to burst?

The average UK house price is now about £184,924. I remember it topping £100,000 in 2002, and even that was considered amazing at the time. So, 84% increase in 4 years. Furthermore, I live in a (rented) house which cost £32,000 10 years ago (our neighbour told us, as he moved in then), but which is now worth about £120,000. An increase of 3.75 times in 10 years(!)

The only homes we can afford in this (job devoid, highly rural and remote) area are at the absolute low end of the market, whereas we can afford to rent the best the area has to offer (though we've stuck to a small house because we're sensible) as the rents are tiny compared to mortgages.

I've looked at graphs of UK house prices over time, and something doesn't add up. Even in the early 90s' recession, house prices didn't fall much (a few percent), they mostly flattened out for several years as confidence returned. But is an average house price of 4-5 times the average national household income sustainable in the same way? In my head it makes no sense that property prices can go up by 3.75 times in 10 years and still be sustainable.

Even our older relatives admit it makes no sense to them as even though they struggled, their income to 'first property' ratio was significantly smaller than today's requirements... and our household income is in the top 25% for this area.

Should we wait until the 'catastrophic' crash occurs and buy on the cheap.. or are we pretty much resigned to trying to hit it rich and/or buy into the market at present no matter how crummy the place is? Or is it ultimately better to rent forever?

posted by wackybrit to work & money (21 comments total)

I should point out that not all statistics show the 1990's dip as being quite so shallow, although the 30% drop from the very short lived peak (as opposed to the current longer-term peak) back then was still a lot more significant than a 30% drop would be now (which would only take prices back 3 years, still well into the bubble).
posted by wackybrit at 4:52 PM on May 19, 2006

In the long run, we are all dead, as Keynes said; but I don't see a return to the days of negative equity for the foreseeable. At least, for as long as interest rates remain relatively low, and as long as Channel 4 and five are obsessed with 'buy it cheap, do it up, sell it high' property programmes. Once 'Location, Location, Location' goes off the air and MDF retailers are shutting up shop, you'll know it's time to buy.

The standard 'professional' property ladder experience in the UK seems to be something like this: move to London, rent a shared fleapit for a few years, buy a small cupboard of a flat in Zone 2, and then either move out to the suburbs or use the equity to buy a small village in France. Entering that kind of market after you've grown accustomed to living with amenities and decent plumbing and/or have a family is really tough.

There are local pockets of sanity outside SE England that are also accessible to job markets. Finding them is the tricky part. I'd look to the example of those living in areas of the US where there are some fairly well-established rules of thumb on whether you should rent or buy. There can never be 'ultimate' decisions, but you can get independent financial advice that looks over the medium-term and takes it out of the realm of gut feeling, so that you know the costs and benefits in raw numbers.
posted by holgate at 5:03 PM on May 19, 2006

Interesting article. Thanks! Since we can currently rent at (almost) half the amount of the mortgage we'd have to pay on the same property, it seems to make sense, then, to keep renting.

Considering the amount of people buying places only to rent them out (with the hopes of selling high when they retire), renting seems like a reasonable long term plan.. but I'm wondering if we'd be kicking ourselves if, in ten years' time, house prices are astronomically higher and rents are shooting up too because 'everyone else' got rich through property.

Unlike the US, the UK is rather odd in that even very poor, rural areas have experienced the same trend due to the ease of moving around the country and the popularity of the rich to buy second homes or investment properties for their retirements. If I lived in the US, I'd just move to somewhere like Utah and be happy in my cheap, nice house. In the UK, you can't really do that.
posted by wackybrit at 5:11 PM on May 19, 2006

Yep, you've found out what most people (at least us in the states) can't seem to believe. Drastic housing price reductions happen very rarely.

People are convinced that housing prices are going to go down by 50% or something. Los Angeles was having some serious issues the last time prices actually went down. Last April was the first "bad" month we had in many, many years and that's because prices only went up 9% since March.

Also, the reason our grandparents had more house (or any house) for their money was because they didn't buy a bunch a crap like us youngsters. They didn't make plasma screens and XBOX 360's back then.
posted by sideshow at 5:34 PM on May 19, 2006

After some reflection, perhaps my question is best reframed as this.. "are we idiots if we severely reduce our quality of life to get 'onto the property ladder' rather than continue to rent for, potentially, years until we have the money?"

As a renter, I feel quite wealthy and can save a lot each month. As a buyer, I'd spend all that on the mortgage and have to settle for a much smaller place too.

As this is an area at the lower end of the market, selling up and 'downsizing' elsewhere when prices rise isn't really an option.. this is a place people downsize to. So.. surely it makes sense to rent if property increases wouldn't even benefit us..? Or..?
posted by wackybrit at 5:49 PM on May 19, 2006

Also, the reason our grandparents had more house (or any house) for their money was because they didn't buy a bunch a crap like us youngsters. They didn't make plasma screens and XBOX 360's back then.

An XBOX 360 is $300. That's a fraction of the cost of one month's mortgage, taxes, and insurance on a $250k house. The reason why youngers have less house (or no house) for their money is because houses are less affordable. Affordability is close to an all-time low despite historically low interest rates. Affordability has never remained this low indefinitely.
posted by malp at 6:22 PM on May 19, 2006 [1 favorite has favorites]

There's an Archie Bunker episode where Edith applies for a $500 loan to buy a colour TV. ALso, if you read the Two-Income Trap, you'll find that people actually spend less on a lot of things. It's housing that's gone up.
posted by acoutu at 6:35 PM on May 19, 2006

If it's really a bubble, it will burst. That's what bubbles do. If it's just a hot housing market, it will cool off instead, perhaps going stagnant for a time. (possibly a decade or more.)

I'm not familiar with the UK housing market, so I can't make a very accurate judgment, but inflation rates that high certainly sound bubblicious to me.
posted by Malor at 6:43 PM on May 19, 2006

Are those charts factoring inflation? For an alternative view (US centric) check this out (I'm HTML illiterate, but scroll down for the May 17 entry entitled Critical Eye Required When Looking At Housing Data .

Anyway, people make too much of a thing of owning the house. My grandparents, solid middle class citizens all, rented their entire lives, and as long as the finances make sense, it's an option with much to recommend it. We sold recently (job move, involuntary, but not regretted), now rent, and I rejoice in not having to worry about the furnace dying, the roof deteriorating, the paint peeling, the gutters falling off- all of which leaves me time to marvel at the houses I can't currently hope to buy in this area. (Good schools, though.)

As to the future- to everything there is a season. Count on reversion to the mean, and count on areas that are job devoid, highly rural and remote to decline faster and further than their opposites. Eventually people will tell you that buying is a mug's game. Probably a good time to buy then.

(Anyway, no one owns in America, and if you think I'm wrong, try not paying your property taxes.)
posted by IndigoJones at 7:23 PM on May 19, 2006

As a renter, I feel quite wealthy and can save a lot each month. As a buyer, I'd spend all that on the mortgage and have to settle for a much smaller place too.

I am not sure how it is in the UK, but in the States there are tax advantages to owning over renting. But if you can get better interest rate on your savings than the expected rate of return on a house then good on you. Not many are that disciplined with their savings. A house really isn't always a safe short-term investment, but historically it is a good long-term one (at least in the States).

Also, research shows (in the States at least) that the younger one purchases property the quicker they will accumulate wealth. Even taking inflation into account, buying a house is one of the best return investments one can make.

The problem, IMO, seems to be that many younger people find buying a house "too expensive" because they are often unwilling to compromise on location. They want to be in the hip & cool area, which end up being the expensive locations. As you said above, if you were in the states you wouldn't mind buying a house in a cooler market and be able to afford more house. Although, personally I would avoid Utah. (sorry, Utahians(?)) ;)

I would still consider speaking with a financial advisor too see what their recommendation might be. I have found professsional advice to be worth it.
posted by terrapin at 7:31 PM on May 19, 2006

Houses will always be cheap out in the sticks. At least, until the sticks become the suburbs because of the neverending glacier of sprawl.
posted by cellphone at 7:47 PM on May 19, 2006

If the cost of renting is substantially cheaper than thecost of owning, you should rent and invest the difference. I findit difficult to believe that housing will substantially outperform shares for anextended period-- especially when you consider where returns are nowadays.

Unless there is an extended resource shock or very restrictive zoning law, it's pretty much certain that housing costs will (eventually) revert to the mean in terms of household income.
posted by Kwantsar at 8:03 PM on May 19, 2006

My space bar is fucked. Apologies.
posted by Kwantsar at 8:10 PM on May 19, 2006

Kwantsar: A 3% increase on a $300k property is $9,000. Given historical returns in the stock market (e.g. 11%), you'd need to first accumulate about $85,000 before you'd start seeing the same dollar value returns.

That being said, I don't advocate putting all your money into real estate. I just wanted to point out how real estate can out do stocks because of leverage.
posted by acoutu at 11:25 PM on May 19, 2006

Prior to no-downpayment loans, there was excellent argument to be made for using one's downpayment money to invest wisely in the markets or funds, and choose to rent instead.

Now, I'm not so sure.
posted by five fresh fish at 11:45 PM on May 19, 2006

I owned a house in the UK for a couple of years from 2000-2002. We sold it when we unexpectedly moved home because the UK tax laws work against non-resident landlords. So I kick myself for leaving the best part of 100k pounds on the table, even though we made a reasonable profit considering we sold after such a short time.
The UK seems to charge quite high rents, and consequently offers quite good returns to investors. This has helped to fuel some of the price rises.
Certainly in 2000 it was possible to buy a property and pretty much cover the mortgage with a tenant's rent.
The rate that prices have outstripped rent increases, however, suggests there is another factor at play.
I believe this was due to a once off shift in the structural factors contributing to property prices, although this is rarely mentioned.
Basically, my parents generation, and through the 1990s in the UK, it was very difficult to get a mortgage.
My father talks about interviews with bank managers to beg for 2x his salary when he had a 20% deposit!
There are other sources of finance now, which have made it possible for anyone who would like, to borrow a large multiple of their income with a tiny or zero deposit. Also, the increased participation of women in work has increased household incomes.
This allows people to spend more (like double) on a house, but, of course, the sellers are awake to all this money sloshing around, so they rise their prices and voila! you have today's market.
I don't expect interest rates to rise dramatically, or the money supply to become tight again, so it appears the structural change of the amount people can borrow has changed the market for the long term.
So...assuming there has been a structural shift that accounts for the ramp up, the next question is whether the ramp up has exceeded what the structural change would mandate.
You can do your own sums, but I think, like me, you will probably conclude the current prices have overshot the mark.
If I am right, it is unlikely houses will double again any time soon, but will more likely continue to drift upwards more slowly, more in line with wage growth.
The other alternative is speculators, who do not intend to live in the houses they buy, will continue to bid up, until a sentiment change will see them selling. The first sign of this will probably be in new city high rise apartments, as they are often sold before completion to people hoping to flip them to others when they are completed, and who will be desperate to sell if prices start to look like they may decline.
In terms of what you should do? If you are saving well now, you might consider staying where you are and buying a local cheaper property and rent it out. You would then have exposure to the massive leverage mentioned up thread (gambling as you are with 95% the bank's money), would benefit from any further property increases, and could probably pay the balance of the mortgage (after the tenant's rent) for much less than a whole mortgage in the type of housing you now enjoy.
And if the whole thing ends in tears (if you lost your job, for example) you could always move into the cheaper house as a fall back.
Such an approach probably works on a cooly logical point of view, but I must admit the benefits of homeownership are significant. The ability to hang a picture where you want, the knowledge any improvements like painting will be enjoyed by you and add to the worth of your investment, and the security of knowing you won't get evicted (which is especially important to me with kids in local schools/pre-schools) are all important.
So I hope you make a good choice and it works out really well!
posted by bystander at 4:04 AM on May 20, 2006

Get a good IFA, Self Certify and go Interest only.
posted by DrtyBlvd at 4:18 AM on May 20, 2006

Houses will always be cheap out in the sticks. At least, until the sticks become the suburbs because of the neverending glacier of sprawl.

That's not true in the UK. Unfortunately I can't find the link but a recent BBC News story showed that average property prices in rural areas are about 19% higher than average city properties prices. This is supposedly causing a retreat to the cities for the less well-off rural young.

The main reason for this is that the baby boomers are now selling their suburban homes and buying up all the previously cheap (but heavily inflating) rural property to retire in.

If we're picky about location whatsoever, it's that we don't want to live in a city or wherever's 'hip' :)

And thanks, bystander, that was an enlightening post. I'd failed to consider the effect of 'easily available money' on the market. As someone who has seen people drown in this new credit avalanche, I find the whole thing abhorrent, but hey.. I guess thems now the rules :)
posted by wackybrit at 5:45 AM on May 20, 2006

I'd always thought Britain had ridiculous planning limitations on the building of new houses, and that was why property was so expensive. Property isn't a finite resource, so if demand increases, supply should increase, but that it can't because of The Holy Green Belt which should be respected above all things, including housing the nations citizens.
If we'd only scrap the Common Agricultural Policy which keeps the price of rural land artificially high, things would be even cheaper.
Are these thoughts wrong?
posted by greytape at 1:50 PM on May 20, 2006

Britain has, what 64 million people? On an island the size of Maine. I'm not surprised that houses with some land and space around them are at a premium.

Saying- oh houses are cheap in Utah, move there is not a fair comparison. There is some serious poverty in the US ofthe kind that you just don't see anymore in the UK so moving to a less "trendy" area may mean not being able to find a job that pays more than $8/hr and having no health care for the rest of your life.
posted by fshgrl at 3:01 PM on May 20, 2006

After some reflection, perhaps my question is best reframed as this.. "are we idiots if we severely reduce our quality of life to get 'onto the property ladder' rather than continue to rent for, potentially, years until we have the money?"

I think the best answer to that question is to look at the lifestyles of people where there isn't such a culture of property ownership, which means going beyond the UK and US in your perspective and looking at countries such as Sweden. Of course, it's always going be something of an apples-oranges situation because of different rental stock, but it's safe to say that plenty of societies seem to do quite well without its professional class rushing into mortgages.

There's something to be said for the nimbleness and mobility that private renting affords, particularly if you've got enough left over after paying the rent to invest or spend on Nice Things.

Lastly, here's another piece on rent/buy ratios from the Economist.
posted by holgate at 1:51 AM on May 21, 2006