Three reasons why the property bubble will not burst...

House price changes are watched with greater anticipation than the mating habits of Giant Pandas. But many homebuyers are worrying unnecessarily. The property market is unlikely to burst or implode. Think less child's balloon or whoopee cushion and more slow puncture. Here are three reasons why:

Reason one: Interest rates

Plenty has been written about increases in interest rates. Never before has a bunch of suits in a confined space commanded as much fascination as the Monetary Policy Committee (MPC) of the Bank of England, which meets each month to set the base rate of interest. In the bleating which has followed recent increases, we forget too easily that we are living la dolce vita when it comes to interest rates. In the bad old days of 1990, we were paying an eye-watering 15.25%.

As a rule of thumb, the Bank of England raises interest rates to slow economic growth and keep a lid on inflation. But if rates are raised too high, then businesses and consumers will slow their spending as they have to meet higher debt repayments. This puts the brakes on economic growth, and in a worst-case scenario could even lead to recession. Economists don't want people to stop spending altogether but to save a little more and break the 'buy now, pay later' cycle. Financial markets believe UK rates will reach 5% by the end of year, while some analysts forecast they could even go a touch higher.

The wise men and women of the MPC carry a great weight of expectation as they aim to strike the fine balance between gradually letting the air out of over-inflated markets while keeping others buoyant. Unless they all go tonto and double interest rates in the next year then homeowners have a lot to be thankful for.

Reason two: Supply and demand

There is now a mountain of statistics to confirm that we are not all over-borrowing to buy houses we cannot afford. More and more people are staying put and using the equity in properties for home improvements. Others are renting until prices come down to more realistic levels, which in turn is benefitting the buy-to-let market. But prices are not the only thing discouraging buyers.

According to RICS (Royal Institution of Chartered Surveyors) in its latest survey of the housing market, the number of properties on surveyors’ books is close to its lowest level for a year, and there are signs that buyers are getting discouraged. In December 2003, 41% more chartered surveyor estate agents reported a rise in house prices than a fall. They put the increase down to a lack of availability of property on the market.

‘Many properties that sat on the market for months last year, have finally been sold as buyers had less choice available,' explains RICS housing spokesman and chartered surveyor, Ian Perry.

RICS believes the housing market bubble will not burst in 2004 and prices will continue to rise, although by only half as much as in 2003. It forecasts a 6% increase in house prices in 2004, based on the Government’s new monthly house price index. This figure is half the 11% rise seen in 2003.

Reason three: Economic stability

Our property market is inextricably entwined with the bigger economic picture in the UK. Overall, we are in rude health. Over the last year, there was a drop in redundancies - the redundancy rate shows a fall of 0.5 to 5.9 per thousand employees which is one of the lowest figures on record. And Britain still has one of the lowest unemployment rates in the world at 4.8% compared with the United States (5.6%) France (9.4%) and Germany (9.8%). In addition to low inflation and historically low interest rates, house prices are on track for a soft landing.

'A repeat of the late eighties slump in prices looks unlikely,' says Alex Bannister, Nationwide's Group Economist. 'Whilst the economic fundamentals remain positive we would expect this to result in a slowdown in price growth as opposed to widespread falls. At the end of the 1980s cycle, house prices fell following a marked worsening in economic conditions. Interest rates rose sharply in response to rising inflation and many people lost their jobs as the economy headed in to recession. The current economic outlook remains positive and although rising rates are likely to act as a brake on the market, we do not foresee economic triggers arising that might cause widespread and sustained price falls,' he concludes.

Experts predict this position is not going to change a great deal in the near future. 'The prospects for the UK economy for the remainder of the year are bright,' comments Martin Ellis, Chief Economist at HBOS. 'We forecast that the UK economy will grow by 3.2% in 2004. This is ahead of the long-term average and faster than last year. Growth is expected to return to around 2.5% in 2005 as higher interest rates temper activity."
Im not so convinced. I dont expect to see a massive crash like the 80`s but I cannot see the current market being able to sustain itself at its current rate.

There are signs of the market slowing down and I have also seen the reports stating house prices could drop upto 25% within 3 years bringing them back to a "normal" level.

The market is still controlled by the house builders. They trickle feed new plots into the market keeping both demand and prices high. The government needs to do more to provide more homes available for first time buyers.

One thing you touched on was how people are cashing in the their new found equity which for some will be in the region of 50K+. I think it is madness that home owners re-mortgage at current rates on top of their existing payments. I dont think the interest rate is going to have to get too high before this has a negative effect. It is this equity that is going to trap home owners as well as pop the home budget forcing people to sell and maybe collapse the market.

Another new factor is the new proposed council tax scheme which has taken advantage of the dramatic rise in house prices.

New pay bands will be introduced which will increase the cost of home ownership even more. So that house you own that has now been valued at over 170K is going to cost you another £1500 in council tax. This surely cannot have a good effect on the house market.


Details leaked to Sunday newspapers indicated that one or two more bands brought in at the top end of the scale and another at the bottom end.

According to the reports, council tax bills for the most valuable properties, could rise from their current level of £2,334 a year to £6,224 in three years.

For homes in the £310,000 to £440,000 bracket, charges could go up from £1,949 to £2,982, it added, while those in houses worth £170,000 or more would also face changes.

The plans would allow the Government to reduce the charges for those in houses worth less.

People living in properties worth between £130,000 and £170,000 at current prices would see their bills unchanged, while those in homes under £130,000 would pay less.

So for now I will sit back fingers crossed. I need to buy a house within the next 5 years. Its a gamble, If I wait I stand to lose out tomorrow like I have in the last 2 years or I stand to gain if prices do fall by buying at a sensible level.

So the bubble bursting? Im optomistic it will :)
Good points all, Disco.

The fact that people are not moving house and that some are using their equity to (hopefully) improve its value is a good thing in the context of avoiding a bursting bubble but as you say the misuse of positive equity is a potential disaster against the background of overspending, enormous debts and lack of savings. It's one of the factors which is encouraging the Bank of England to push interest rates up - they hope it will take the heat out of our overspending and credit-happy habits. So far it hasn't had much impact so you can bet that our country's economists are thinking about ways to change that.

I have no doubt that lots of people are going to live the rest of their lives hopelessly in debt because they blew positive equity on holidays and clothes and took advantage of every credit card and loan offer which arrived in the post. They wont be prepared for higher monthly mortgage payments which come as a result of interest rate rises and, as you point out, the extortionate council tax bills.

The one thing which maddens me is that nothing is being done to stop the lenders and finance companies from allowing people to over-borrow. A lot of companies are getting very rich indeed through what will ultimately be stress and misery for their customers. We don't want a nanny state and it is up to individuals to have self-discipline and responsibility for their own finances but it is impossible to overestimate the lure of money, especially when it is being offered on a plate by so many lenders.

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