How to play down a housing boom like it’s 1999
Even those who are adamant Britain won’t succumb to another runaway rise in house prices ought to know one thing.
The arguments against the existence of a new housing bubble are identical to those that crumbled during the last one, in the decade leading up to 2008.
A 1999 Reuters poll which asked “Is Britain seeing a rerun of the 1980s property boom?” shows how.
Here’s some of the top reasons from 1999 why a housing bubble wouldn’t form, which are re-appearing 14 years later.
The Bank of England will stop a bubble forming
- 2013: “If there’s another bubble, the Bank of England and the Government of course have means by which we can anticipate that and ensure that that doesn’t happen again.” – Danny Alexander, chief secretary to the UK Treasury.
- 1999 Reuters poll: ”Economists and property specialists say the Bank of England won’t let another inflationary boom happen. The Bank has already said it will monitor house prices closely. ‘It’s unlikely to become inflationary unless the monetary policy stance becomes too loose and that’s highly unlikely,’ said economist Trevor Williams of Lloyds Bank TSB.”
House prices expressed in real terms are below their peak and affordability is better
- 2013: “Some have questioned whether new risks are emerging in the housing market. This debate would benefit from a little less assertion and a little more examination of the evidence. House prices are down a quarter from their peak in real terms, and relative to earnings they are back at 2003 levels.” –George Osborne, finance minister
- 1999 Reuters poll: “‘In real terms, they are still 24 percent below what they were at the peak of the boom in the 1989 third quarter,’ said John Stewart, (then) economic adviser to the House Builders’ Federation. ‘If you look at the UK as a whole, house prices have only fairly recently passed 1989 in nominal terms.’ Other differences with the (1980s) boom years include the affordability of property. The ratio of prices to salaries, a yardstick of whether houses are overvalued, is now three times average earnings – in line with long-term trends. In the late 1980s, house prices jumped to five times average earnings.”
The average UK mix-adjusted house price in August 2013 was 247,000 pounds ($394,000), according to the Office for National Statistics. In 1999, it was 96,000.
Activity is far below peak levels
- 2013: “We need to put recent developments in the housing market in some context. Activity levels, mortgage applications, valuations are still below. There are pockets where this is different, as you’re well aware. But across the nation, they’re still in the range of two-thirds to three-quarters of pre-crisis levels. We do need to be vigilant about this, but we also need to look at the starting point.” – Mark Carney, Bank of England governor.
- 1999 Reuters poll: ”Another factor making this market different is that turnover is much lower. ‘Throughout the 1980s, transactions were around 1.8 million every year and over two million at the peak in 1989,’ said Alex Bannister, (then) group economist at the Nationwide Building Society. ‘We expect 1.45 million transactions this year – quite a strong number but still half a million down on the peak.’”
Runaway house price rises are really a London phenomenon
- 2013: “The picture emerging is of prices starting to rise, some sense that people are expecting prices to rise, but we’re coming back from a relatively low base. And of course a very patchy picture, because it’s very different – there’s quite a dispersion across the country. So that doesn’t really look as if there’s a bubble.” – Jon Cunliffe, incoming Bank of England deputy governor.
- 1999 Reuters Poll: ”The 28 participants said the upturn is much patchier and more regional. ‘The biggest rises have been in the southeast and London,’ said Milan Khatri, (then) economist at the Royal Institution of Chartered Surveyors. ‘While it has spread out to the rest of the country, the rises are not spectacular and prices still are falling in some areas whereas in the late 1980s no one was reporting any falls.’”
Of course, there are some big differences with 1999. For one, Britain’s damaged economy of 2013 is a far cry from 1999′s, when it faced relatively rapid growth in the years ahead. While the average house price in Britain has hit another record high, the level of economic output is still far below where it was at its peak before the financial crisis began. And Britons have become poorer. Some economists say those are reasons enough not to expect a repeat of the last housing boom.
But the other big difference is the government’s direct intervention in the mortgage market, through its Help to Buy mortgage guarantee scheme. Housing market activity, although still subdued by historical standards, has picked up markedly since George Osborne announced the scheme in his Budget.
A slim majority of economists polled by Reuters in August said the programme should be halted, while another poll suggested most economists thought there was a 50 percent or greater chance that another house price bubble is on the way.