Are Fears of a British Housing Bubble Well-Founded?

Houses

Nick Clegg, the deputy prime minister of the United Kingdom, declared that the country is “nowhere near” experiencing a housing bubble, and that the government has the means necessary to prevent one from occurring, Bloomberg reports.

Concerns have arisen over a potential bubble in the U.K. housing market because of the so-called Help to Buy program. The first phase of the program, begun in April of this year, offered interest-free loans to first time buyers from the Bank of England. The second phase — which is slated to offer 130 billion pounds, or over $200 billion, to back mortgages — was originally planned to launch this January, but it may begin to enter implementation near the end of this year.

The goals of the program are obvious. It is designed to make home ownership more accessible to people across the United Kingdom, especially to first-time buyers. In theory, this is a big positive for the economy because it allows younger people to invest in an asset and build equity while also stimulating the housing industry.

However, some have expressed fears that the bank’s policy may backfire, serving to hurt the industry that it was meant to help. The first concern is that home prices will rise drastically, making housing, in an ironic twist, less accessible to the common person. Though loans would be easier to come by, the amounts of the loans would rise, pricing some people out of the market entirely and making those who would still be in the market for a house forced to borrow more money.

Another concern is that a bubble could easily be created in the housing market. If prices continue to soar due to the bank’s program, they will inevitably fall when the bank ceases funding the sector.

This would cause house prices to drop, potentially drastically decreasing the values of new and existing homes. This would be disastrous not only to homeowners, who would lose equity value and be trapped into huge mortgages, but also to the housing industry, which would find demand for new homes to have once again plummeted.

Concerns about such a bubble have surfaced ever stronger over the past weeks. Last week, the Royal Institution of Chartered Surveyors called on the bank to ensure that house prices do not rise more than 5 percent per year in an effort to avoid such a bubble. However, prices are currently increasing by more than that amount with regional variance meaning that London house prices have increased by approximately 40 percent since mid-2009.

Another sign of a potential bubble comes from the real estate sector — with over 550,000 employees — is at its largest size ever. These jobs, too, could all be in jeopardy if prices balloon and then contract. Many who are watching the issue have their eyes set on a meeting of the Financial Policy Committee of the Bank of England to be held this Wednesday where the Help to Buy program and its economic impact are sure to be on the discussion table.

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