Red-Hot Real Estate Prices Are Due for a Summer Breather

U.K. house price rises have reached a 17-year high, according to the June Nationwide survey citing 13.4% annual growth. Statistically, this pace looks unsustainable, as prices for the rest of the year will be compared with the swiftly rising prices of the second half of 2020. Those base comparison effects will probably show the annual rate of change topping out.

But prices will be steadily rising for quite some time yet. The U.K. is only in fifth place in the global trend of much of the developed world experiencing rapid house price growth. (New Zealand, Canada, Sweden and Norway come out ahead.) And these gains are appearing despite a retreat of international buyers due to Covid travel restrictions. Eventually, they’ll be rejoining the party. What’s more, price spikes are spreading to rentals. Pretty soon it won’t just be Houston (well, Austin, Texas, this time) that has a problem.

What is noticeable in the latest U.K. Nationwide survey is that the strongest price gains are in oft-overlooked areas such as Northern Ireland and Wales, though prices there are still, on average, about a third of those in London. It’s good to see some regional leveling up as city dwellers head for the hills in search of value and functioning WiFi. Unlike a decade ago, it’s London now that is wallowing. But there is reason for optimism in the capital, especially when the economy fully opens up, as Bloomberg Intelligence highlights

Skirting the trend a bit is Scotland, which is “only” up 8% since its tax holiday on property purchases ended in March. The upcoming end of a similar tax break in England will likely only have a marginal effect, because even when the cost of buying a home becomes more expensive, the country’s underlying bullish conditions persist.

One big concern is that house price-to-earnings affordability is nearing its highest levels since 2006. That’s a problem for first-time buyers trying to drum up enough savings to afford the deposit. The flip side is that for those who have secured a mortgage, today’s ultra-low interest rates mean monthly loan payments aren’t that much more than the long-term average for mortgage affordability.

In other words, those already on the housing ladder have rarely had it so good, while those hoping to get on will keep struggling. By saving this part of the economy with so much stimulus, it’s the younger generations that’ll have to pay.

But what did we expect after such a herculean central bank response to the pandemic recession? No doubt it was better to go big than to fall short in protecting the economy, but some aftercare was always going to be needed. With interest rates never getting far from zero and effective credit spreads charged by mortgage lenders recently tightening further, we’re seeing a boom in demand for property loans. Sprinkle in perhaps unnecessary tax breaks (ahem, England’s stamp duty holiday), tight planning regulations and supply constraints, and then season with a sudden desire to WFH from the countryside, and you’ve got a recipe for surging house prices.

Perhaps it’s time for a coordinated macroprudential approach to rein in asset price growth, rather than simply tinkering on a local basis with red tape and other micro restrictions. We have a plethora of G7 and G20 conferences that can raise the issue. After all, if corporate taxes can be corralled, then why not out-of-control real estate? The upcoming shindig of global central bankers and finance minsters, hosted by the Kansas Fed in Jackson Hole in August, looks particularly well-suited to address the matter.

The Bank of England’s Prudential Regulation Authority did impose strict measures on loan books to force U.K. mortgage lenders to keep risk to a minimum during the worst of the pandemic recession. (At the same time, the monetary policy committee charged ahead with its vast quantitative easing stimulus.) But as the banks luckily avoided any bad-loan fallout and thrived on all the stimulus, it’s only logical they’d take advantage of decent capital adequacy ratios and rush into mortgage lending. The alternatives in the comparably safe fixed-income arena have been so low-yielding. 

It’s a similar situation across much of the world. Fortunately, others are taking steps to get a grip on asset prices. The Reserve Bank of New Zealand is considering a debt-to-income limit for borrowers (it already restricts foreign buyers), and the Bank of Canada is ahead of the rest of the global central banks in tapering its QE bond purchases. A problem shared could be a problem halved.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

©2021 Bloomberg L.P.

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