Could revised economic growth rates feed the UK housing bubble?

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Could revised economic growth rates feed the UK housing bubble?

Could revised economic growth rates feed the UK housing bubble?

The Office for National Statistics (ONS) has upgraded UK economic growth in the second half of 2013 from 0.6% up to 0.7%. While in numerical terms this is a relatively small increase, it does reflect the fact that the UK economy is growing in strength and there seems to be momentum gathering behind the ongoing economic recovery. As a consequence there are serious concerns that the ongoing economic growth could further inflate the UK housing bubble which, as always, seems to be centred round London.

If the UK government had perhaps held off the introduction of stage one of the Help to Buy scheme earlier this year, with stage two set to be introduced in early 2014, would it still have gone through with the program bearing in mind recent economic data?

Fanning the flames of growth

Even though all political parties were demanding significant financial assistance for the property sector in the UK the fact is that if the UK authorities knew what they know today, they would probably have scaled back the size of the Help to Buy scheme. The fact that stage two is set to be introduced in the first quarter of 2014 will be yet another injection of fuel and optimism into the UK property sector – a sector which is already moving quicker than the economy.

This puts the authorities in a very difficult situation because it is unlikely they would want to lose face and delay or cancel stage two of the Help to Buy scheme in 2014. Whether or not this would be the right thing to do is a matter of debate but there is no doubt it will increase levels of interest and demand in the property market.

Should the UK government increase base rates?

The simple fact is that the UK government does not have direct control of UK base rates which are set by the Bank of England and its new governor Mark Carney. He recently suggested that base rates would not increase until after the next election and despite the fact he has received significant criticism for this particular stance, he again cannot afford to change his mind and lose face, especially at this early stage of his Bank of England career.

Quote from PropertyForum.com : “One in four retired home owners in the UK hope to raise £62,000 by moving into a smaller home, new research shows.”

In all honesty there is debate as to whether an increase in base rates would effectively kill stone dead the ongoing economic recovery because money markets around the world are still very fragile. It would not take a major economic event in Europe, or outside of Europe, to spook investors and see money market borrowing rates move higher.

Conclusion

If, as many expect, the ongoing UK economic recovery continues this will add more fuel to the fire which is the UK property market. When you also take into account the Help to Buy scheme, stage one and stage two, this will yet again increase interest in the UK property market and push prices higher. It is unlikely that the UK government will scale down the Help to Buy scheme, interest rates are almost certain to remain at current levels until after the next election and the UK property market is to all intents and purposes at the beck and call of investors. Have investors learnt lessons from years gone by when property prices were chased to unsustainable levels?

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