The UK property market continues to rise at an insane pace.
Latest figures from Halifax show house prices leapt 10.2% year on year. In London, they grew 15.9%.
Spiralling house prices have made London the millionaire capital of the world, according to research from Johannesburg-based wealth consultancy New World Wealth.
One in 35 Londoners has assets of more than $1 million, more than anywhere else.
Anybody hoping to get on the property ladder must be feeling punch drunk right now, wondering how they can keep up with this crazy rate of growth.
This Can’t Go On
Your income almost certainly won’t be rising in line with house prices. Wages are growing just 1.7% a year, below the consumer price inflation rate of 1.9%.
That means the value of your earnings are falling in real terms.
Don’t despair, house prices can’t continue rising at an unreal six times wage growth forever. Like any bubble, this one will eventually stop blowing.
Soaring house prices have primarily been driven by cheap money. But mortgage rates are creeping upwards as the economy booms and lenders anticipate the first Bank of England base rate hike.
The National Institute of Economic and Social Research has just predicted that the first rate hike will come next February. That’s just six months away.
Rising borrowing costs will take some of the wind out of the market.
Lending Is Getting Tighter
The Bank of England is also working behind the scenes to slow house price growth. It recently introduced limits on the number of loans lenders can offer above 4.5 times income.
It is also considering tightening bank lending ratios, which could force lenders such as Barclays, the Co-operative Bank and Nationwide to cut back on their activities and hike rates.
This week, the influential OECD called on the Bank to scale back and then scrap the controversial Help to Buy scheme, which helps buyers with small deposits get on the property ladder.
Losing Its Edge
The other key factor driving prices is shortage of supply, which has failed to keep pace with the rising UK population.
This will take time to turn around, but there is good news here as well, with housebuilding now rising at its fastest level in a decade, according to this week’s Markit/CIPS survey.
There are early signs that house price growth is now slowing. Nationwide’s latest data showed shows that prices rose just 0.1% in July, the smallest rise in 15 months.
Bank of England deputy governor Ben Broadbent recently said “the edge is coming off the housing market”.
Let’s hope so.
Shifting Down The Gears
If spiralling house prices have left you feeling edgy, rest assured, markets never move up in a straight line forever. Just look at the FTSE 100. Last year, it rose almost 12%.
So far in 2014, it has gone sideways.
Investments typically go in cycles. House prices are whizzing along, stock markets are pausing for breath.
Some time soon, these cycles will change.
