Demand for property in the UK has sparked a rise in prices that has been unseen since the collapse of the financial markets back in 2008. The unprecedented rise has been so significant that it has pushed current figures past previous highs, recorded during the financial boom that led to the onset of the financial crisis. While this may be cause for positivity for sellers of property, there is widespread concern across the market that this surge in values could destabilise an economy that has barely recovered from the effects of a damaging recession.

The most significant area of growth in England has been in London, and has affected the market so considerably that the Office of National Statistics has reported that the average house price for the UK now sits at £255,000. This figure constitutes a 3.7% rise, pushing the average purchase value above the previous highs of 2008. A notable point is that the average rise for the same period outside of the capital is far lower at 0.8%, adding credence to argument that the disparity between the capital and the rest of the UK appears to be widening month on month.

Calls for extended measures to stem the tide of rapid rises have gathered pace over the past month, with the Royal Institute of Chartered Surveyors calling for a 5% cap to be enforced on annual property growth. Joshua Miller, the chief economist at RICS, said: ‘The Bank of England now has the ability to take the froth out of future housing market booms, without having to resort to interest rate increases. Capping price growth at, say, five per cent is one way of doing this.

Miller also stated that, ‘This cap would send a clear and simple statement to the public and the banking sector, managing expectations as to how much future house prices are going to rise. We believe firmly anchored house price expectations would limit excessive risk taking and, as a result, limit an unsustainable rise in debt.’

The expectation in the market has risen that the Bank of England’s Financial Policy Committee, tasked with maintaining financial stability for the country, will need to take measures to control the risks of the housing bubble growing. It has often been noted by many leading economists that the Governments Help to Buy and Funding for Lending schemes may prove to be more damaging for the market in the long term. The fear is that by making funds too freely available, levels of debt will rise at a disproportionate rate, when compared to the average income in the UK.

A major quandary for the FPC is how and when it should act. The committees function has historically been one of guidance, rather than of enforcing active measures. Against that directive, the FPC are currently in a position where justification needs to be provided that allowing, and in some cases forcing, banks to lend at all-time low interest rates is not destabilising the economy further.

Lucian Cook, head of UK residential research, commented that the FPC’s current process is not fitting, considering the vast differences between activity and prices for London and the rest of the UK. He said: ‘The difficulty is you have significant variations between London and the rest of the UK, so it is impossible to control pricing by manipulating the entire mortgage market. All it will achieve is to create further polarisation between the equity-rich buyers and the debt-reliant market.’

Even though the signs of a potential crisis appear to be looming, in some quarters the feeling is that any rise in concerns is premature. The Council of Mortgage Lenders noted that current activity levels are still lower than those seen during the recovery process in the early 1990’s. Indeed, they confirmed that activity is still at two-thirds of the level seen before the crisis hit in 2008. Ultimately, the consistent theme for the market is one of positivity, tempered with caution that previous mistakes should form the most important lessons for the future.

Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy

Media Contact: Raman Kaur, Public Relations Manager

Tel: 01489 555 080

Email: media@contractormortgagesuk.com