Are days of UK property booms and busts over?

Has the UK property market moved beyond cycles of boom and bust? London house prices soared in the aftermath of the financial crisis but have since largely flatlined. Now real estate throughout the UK is facing stiff headwinds, and the red flags are popping up.
Interest rates are rising and economists expect more increases. Buyer inquiries fell in May after gaining for eight consecutive months, according to the Royal Institution of Chartered Surveyors’s latest survey. An index of housebuilders’ shares has fallen more than one-third since April 2021, though both London and UK house prices hit records this year.
The current cycle got underway after the financial crisis, during which UK property prices fell almost 20%. That was a bust with a small “b” compared to the US and Ireland.
After the 1990s downturn in the UK, the ratio of house prices to average worker incomes bottomed at about three times, according to Nationwide Building Society. In 2009, this measure troughed at six for London and five for the UK: Property never touched bargain levels when measured relative to wages.
The London bubble quickly reinflated. As is well known, weaker sterling made the capital’s prime districts cheap to international buyers, stimulating activity in other neighborhoods. The finance sector — and banker pay, now in the form of higher fixed salaries — staged a surprise revival.
A cut in the UK’s base rate to 0.5% meant borrowing costs were very low when the mortgage market reopened. Those who could amass the deposits required for a home loan could get great terms. That played to London and the southeast.
The eurozone crisis saw London attract more foreign money as a safe haven. In 2013 came taxpayer-funded schemes to support homebuyers; house-price-to-income ratios in the capital soared past their pre-crisis peak that same year. Competition among lenders saw two-year fixed mortgage rates halve between mid-2012 and mid-2015, fueling the upswing.
But London’s frothiness prompted counter measures that have kept property-price growth in check by limiting the use of leverage. They’ve so far prevented a boom or a bust. The government imposed higher taxes on purchases of high-value properties and second homes. The Bank of England set limits on what banks could lend as a multiple of borrowers’ income and required them to stress-test how buyers would cope if rates rose.
The result: London overall has traded sluggishly from 2016. Its property prices relative to average earnings have nevertheless stayed above a giddy 10 times, meaning purchases with mortgages require large deposits. That’s forced many buyers to look further afield. Covid amplified the appeal of the hinterlands as city dwellers sought space and retirees reconsidered their needs. Lately, London has picked up again, although Brexit uncertainty appears to continue to have dampened interest from international buyers even amid sterling fragility.
Growth in the far cheaper market in the rest of the UK gained speed during the pandemic. It might be a stretch to call this a full-blown boom. Prices relative to earnings are just above the pre-crisis peak, but mortgage rates remain lower. First-time buyers’ mortgage payments are running at 31% of take-home pay for the UK as a whole, versus 46% before the 2007 crash, according to Nationwide.
As the economic context shifts, the market must contend with both tighter borrowing conditions and inflation cutting the income available to service home loans.

—Bloomberg