|
Many commentators believe that a British property bubble has been existing since about 1998 in the British property market. The very question of whether the British property market is in a bubble, or whether house prices can sustain themselves, is a matter of controversy.
Debate
Property prices in Britain have risen dramatically between 1996 and 2005. Many commentators (property bears) believe that in part this is not due to economic reasons but to a bubble mentality among speculators.
In Britain, it has been contended, the long term average ratio of average house prices to average annual incomes has been 3.5 - in 2005 the ratio was around 6 - leading to some analysts claiming that house prices were overvalued by about 40%.
Other commentators (property bulls) claim that the rise in prices is a rational reaction to high employment, economic stability and low interest rates.
History
British property prices were at an all time nominal high in the late 80's due to the a prosperous economy, the increasing quality of housing through an increase in newly-build housing stock and newly leased right-to-buy council housing.
Property prices fell by 30% through the early nineties mainly due the worldwide recession. There was an increase in property repossessions by banks and building societies, and many people were left with negative equity for a number of years.
Prices started to recover in 1996, slowly at first and in some limited areas. By 2001 prices had in most places returned to their pre-collapse levels, and continued to rise, so much so that in 2004 many properties were "worth" double their market price only three years before. In many cases prices were increasing by 20% per year (1.5% per month).
Reasons
A number of reasons have been given for the rise in prices:
- Growing public confidence in the economy due to high employment and economic stability
- An increasing amateur rental ("buy-to-let") sector
- A falling stock market, especially after the dotcom bubble, feeding into a general lack of confidence in the stock market.
- A fall in confidence in the pension system, with reduced returns for private pension holders and the Equitable Life scandal.
- Increasing money supply and low interest rates (interest rates in 2004 was 4.5%, back in 1990 it was 15%).
- An inability of many house buyers to adjust to a low inflation (inflation in 2004 was approximately 2%) economy, leading to a belief that high house prices can coexist with low interest rates.
- A belief that "bricks and mortar" are a comprehensible and naturally safer investment compared to alternative investments such as the stock market
Recent Developments
The price rise has continued in many parts of the country, despite four interest rate rises, however prices seem to be dropping on highly priced properties and properties in London. Some analysts say that a price crash of 20% is possible in 2005 and many expect further "price falls of 30% to 40% from the peak over the next few years". A fall of 40% would take the average price of a house down from £165,000 to between £99,000 and a fall of 30% would take the average house to £115,500. Large falls could mean that many highly mortgaged households could find themselves in negative equity.
External links
| 
