The current cycle began after the financial crisis, during which UK property prices fell by almost 20%. It was a bust with a small “b” compared to the United States and Ireland. After the UK’s 1990s downturn, the ratio of house prices to average worker earnings bottomed out around three times, according to the Nationwide Building Society. In 2009, this measure hit a low of six for London and five for the UK: property never reached bargain levels when measured against wages.
The London bubble quickly reinflated. As is well known, the weakness of the pound sterling has made the best areas of the capital cheap for international buyers, stimulating activity in other areas. The financial sector – and bankers’ compensation, now in the form of higher fixed salaries – staged a surprise recovery.
A reduction in the UK base rate to 0.5% meant that borrowing costs were very low when the mortgage market reopened. Those who could raise the deposits required for a home loan could benefit from advantageous conditions. This played in London and the South East.
The Eurozone crisis has seen London attract more foreign money as a safe haven. In 2013 came taxpayer-funded programs to support homebuyers; property price-to-income ratios in the capital exceeded their pre-crisis peak in the same year. Competition among lenders saw fixed two-year mortgage rates halve between mid-2012 and mid-2015, fueling the recovery.
But the London scum prompted countermeasures that kept house price growth in check by limiting the use of leverage. So far they have prevented a boom or bust. The government has imposed higher taxes on purchases of high-value properties and second homes. The Bank of England set limits on what banks could lend as a multiple of borrowers’ income and asked them to test how buyers would react if rates rose.
The bottom line: Overall, London has traded slowly since 2016. Its house prices relative to average incomes have nonetheless remained above a dizzying 10 times, meaning buying with mortgages requires deposits important. This has forced many buyers to look further. Covid has amplified the appeal of the outback as city dwellers seek space and retirees reconsider their needs. London has rallied lately, although Brexit uncertainty appears to continue to dampen interest from international buyers, even amid sterling weakness.
The growth of the much cheaper rest of the UK market has accelerated during the pandemic. It might be an overstatement to call this a full-fledged boom. Prices to earnings are just above the pre-crisis peak, but mortgage rates remain lower. Mortgage payments for first-time buyers are 31% of take-home pay for the UK as a whole, down from 46% before the 2007 crash, according to Nationwide (in London they’re at 51%, down from 62% pre-crisis.)
As the economic environment evolves, the market faces both tighter borrowing conditions and inflation that reduces income available to service mortgages. Most UK mortgages are at fixed rates and are not immediately likely to increase the BOE base rate. In the years to come, these agreements will expire in a more difficult climate.
Post-crisis financial regulation is therefore put to the test. Before long, we will find out if the measures taken to cool the market in the middle of the last decade are succeeding in preventing borrowers from taking out loans they cannot afford at higher rates.
Based on a model of average household incomes and mortgage rates, UK house prices do not appear to be overvalued to the extent that they were before the financial crisis or recession of the 1990s, although mortgage rates above 4% could lead to flat or slightly lower prices, says Richard Donnell, executive director of the establishment’s Zoopla website. An era of weaker earnings is ahead, with nominal house prices following earnings growth, he believes.
The relative cheapness of UK regions – and the government’s commitment to boosting them – suggests that the UK market as a whole could hold up even better than the capital. In addition, volatility in global equity indices has dampened investment banking activity, which will hit London’s financial sector this year.
Regardless of the capital’s relative performance to the county, a period of pedestrian growth or mild declines would be a success in fiscal policy. Housing is infrastructure and should operate as such rather than jumping into double digit percentages. After all, a Brit’s home is their castle, not a hedge fund.
More from Bloomberg Opinion:
• UK cost of living crisis petrifies tenants: Marcus Ashworth
• Boris Johnson’s housing headaches not over: Therese Raphael
• Cooling housing market will lead to more dysfunctions: Conor Sen
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering the deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
More stories like this are available at bloomberg.com/opinion
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