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Will the Housing Bubble burst?

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Introduction

Will the Housing Bubble burst? The UK Housing market has suffered a dramatic acceleration in House Prices over recent years, far above the rate of Inflation. The main cause for this is demand outstripping supply, the classic Economic scenario. The easiest answer would be to increase the supply, and if we were talking about any other good, then this would be easy. But in the Housing market there are many barriers to increasing the amount of supply. Firstly, you have to find a location, one that would appeal to buyers and would be suitable to build upon. Then planning applications have to be filed, this can often take years to obtain - and can be very difficult. Then the houses have to be designed and built, which is a question of logistics and time planning - and finally buyers have to be found - although in the current climate this would not be very difficult. ...read more.

Middle

RICS said the increases were the result of fewer suitable houses coming onto the market, with the average number of properties per surveyor falling to 60 in April from 67 in March. The evidence of higher prices was backed up by figures from Hometrack, which monitors 4,000 estate agents in England and Wales. It said prices had risen by 7.7% in the first four months of this year and by 2.6% in April. But of course, all inflationary pressure is linked to the Interest rate and what the MPC decides is right for the economy, John Wriglesworth of Hometrack stated "If the MPC raises interest rates by 2% then I think that could cause the housing bubble to burst. If the MPC does not over-react, and if interest rates go up by a quarter or half of one percent, then I think house prices will run out of steam next year." ...read more.

Conclusion

The country's second-biggest mortgage lender, the Nationwide building society, said house prices rose by a record 3.4% in April. The current property boom - the biggest in over ten years - has been fuelled by high levels of employment and low interest rates, making mortgage loans cheaper. A shortage of saleable properties, particularly in the south-east of England, has further accelerated the rate of house price inflation. RICS said the property shortage is holding back sales activity, with surveyors completing 37 sales on average during April, down from 38 in March. The organisation added that overpricing has made it difficult to sell some houses, especially in property hotspots such as London and the south-east of England. Prices rose fastest last month in Yorkshire and Humberside, followed by Wales and the north of England. Overall, I believe that the housing bubble will not burst, but will gradually shrink. As long as demand exceeds supply - prices will remain artificially high. ...read more.

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