UK housing looks dangerously inflated in some areas, with London prices rising 8.1 per cent in the past 12 months. The average house price-to-earnings ratio has risen to 7.1 per cent in the capital, near to the historic highs of 7.2 at the height of the last bubble in 2007. A combination of low interest rates and the impact of government schemes such as Funding for Lending and Help to Buy risk inflating prices even more. At first glance, Help to Buy gives people the finances they need to get on the property ladder. But with greater numbers of buyers having increased finance at their disposal, builders will be tempted to increase prices. And this is at a time when demand vastly outstrips supply – we need to build at least 250,000 homes each year to meet demand. A scheme stoking demand without any incentives to supply more homes could only lead to spiralling house prices. Mark Henderson is chief executive of Home Group.
UK house prices are now recovering after a couple of fairly flat years, having risen 3.1 per cent over the year to June. But we are still a long way from the kind of national housing bubble we saw in the late 1980s and 2006 to 2007. Average UK house prices remain more than 15 per cent below their 2007 peak in real inflation-adjusted terms, and we don’t expect them to regain this peak before 2020. This reflects the fact that real earnings growth remains negative and many first time buyers still find it very difficult to get on the housing ladder. The government’s Funding for Lending and Help to Buy schemes are boosting the market at present, but if house prices show real signs of overheating, these schemes are likely to be phased out and interest rates will start to rise. In the long run, UK housing bubbles can not be ruled out, but this seems unlikely over the next couple of years. John Hawksworth is chief economist at PwC.