There has recently been a lot of media focus on the continuing rise in house prices, pointing out an increasing number of people who cannot afford the high property prices, especially in London and the South East. Panic buying is being reported in the housing market and it is suggested this rush to buy is driving prices ever upward and the inevitable over-heating of the market will result in a property slump similar to the late 1980s.
Although prices continue to rise, this is doing nothing to dampen demand. Swelling demand is an influx of first-time buyers ‘ worried that future price rises will prevent them from getting on to the property ladder. The increase in demand for private rental property by buy-to-let investors is also said to be fuelling run-away property price increases especially in London.
While many industry pundits are warning these large price increases may result in a property market crash, I believe it is dangerous to be certain of a pending slump in the market. There has always been a cycle of peaks and troughs in the market, but the factors which caused the troughs historically, may no longer be powerful enough to have the same effect.
There are a number of reasons why the property slump we experienced 10 years ago may not follow as an inevitable consequence of the current acceleration in house prices. First, the interest rate climate is different from that of the early 1990s. Interest rates are low worldwide and at their lowest for 40 years in the UK. There is a stable environment for interest rates and we are not likely to see them back in the high teens again, as we did in the late 1980s.
Second, the last housing slump is still a vivid memory. Lenders should be exercising greater levels of prudence in LTVs and income multiples than prior to the last crash.
Third, the market is now more nimble and responsive to borrowers’ needs. Products exist for all borrower profiles including those who suffered in the last downturn and were stranded when they wanted to borrow again. Now there is a well-developed niche lending market that can keep generating new loans, should there be pockets of housing market collapse.
Finally, poor stock market performance and low returns on savings are reinforcing the faith of the public in bricks and mortar as the best investment option. Combined with the ability of the market to provide product solutions for all credit profiles, this will ensure that customers continue to come through the doors of mortgage intermediaries for the foreseeable future.