Heating Up—A Look at UK Housing

Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?

Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.

While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).

Reducing lending risks for buyers with previously insufficient down payments should boost home buying and lending. But scant early data suggest Help to Buy has had only moderate influence. So far, two lenders have released early results. Between them, applications totaled 2,384, worth up to £365 million in total loans. The approval process has proven slow, and just 5% of purchases have been completed. No other official numbers have been released, though older estimates showed Help to Buy resulted in just 7,000 newly built homes reserved for purchase as of late July. Of those, prices averaged £188K, and loans totaled just ~£1.3 billion, barely scratching the surface of the program’s limits. The estimates are clearly outdated now, but even in junction with more recent figures, they illustrate Help to Buy’s overall impact on UK housing is, thus far, limited.

With or without the government’s scheme, UK housing is improving: Mortgage approvals are at their highest since 2008, and gross mortgage lending rose 17.6% q/q in Q3—up 40% y/y. But these gains don’t amount to any sort of bubble. Mortgage approvals are still well below their long-term average, and gross mortgage lending has recovered only to 2002 levels.

Official home price data also confirm recovery, showing UK-wide home prices rising +3.8% y/y in September. But price spikes have been primarily concentrated in London—where growing foreign demand is driving prices higher. From their 2009 low, London prices have grown +42%, rising +9.3% y/y in September alone. Outside London, prices grew only +2.1% y/y, while CPI grew +2.7% y/y, effectively negating the improvement. Scotland’s home prices actually fell -1.1% y/y, as did Northern Ireland’s (-1.5% y/y; to help scale, the Scottish and Northern Irish populations combined roughly match London’s). Though, it’s worth noting official data include only transactions involving a mortgage—cash deals aren’t included.

So a UK housing bubble seems a ways off. London home prices are rising because of basic market functions—high demand outpacing limited supply. Can home prices in London continue rising if Help to Buy continues? It’s certainly possible. But rising UK—or more specifically, London—housing seems to be a rational byproduct of the country’s ongoing and accelerating economic recovery. In my view, housing bubble fear is noise distracting us from the bigger picture. Investors doubting the UK housing market’s stability—and overlooking the wider improvements—should eventually see reality is better than they expect.