Everyone, it seems, is warning about a housing bubble. Well, they can all calm down because it’s not going to happen – at least in Scotland.
The latest bout of anxiety about house prices was triggered by a report from the Office for National Statistics (ONS) showing that UK house prices were 6.8% higher in January than they had been a year earlier. You can find that report here.
But look a little deeper and you’ll find that the increase is far from evenly spread across the country.
Prices in London were up by 13% compared to the same time last year and by 7.1% in the south east of England. Take them out of the equation and UK house price inflation falls to 3.8%. Prices in Scotland were up by just 1.4%.
In other words, if there is a bubble forming, it is confined to the south of England.
But will the same effect not get to Scotland eventually? Almost certainly not – here’s why.
Bank ready to act
Firstly, the Bank of England and its Financial Policy Committee (FPC) are already alert to the prospect of a price bubble. In a statement released today, the FPC said of house prices that it: ‘will remain vigilant to emerging vulnerabilities, will continue to monitor conditions closely and will take further proportionate and graduated action if warranted’.
It also said that it was developing a new stress test for banks, a key part of which ‘would examine the resilience of the banks to a housing market shock’. It could, if it wanted to, tighten the rules about how much money banks must hold relative to their loans which would have the effect of limiting the amount they could lend.
Bubbles tend to form, of course, when those involved are not aware of the risks. The fact that the FPC is already thinking about taking action to cool the market means that a) a bubble is less likely to form in the first place and b) that action is likely to be taken long before bubble behaviour reaches Scotland.
New mortgage rules
Secondly, new rules on mortgage lending come in to force on the 26th April. The rules, known as MMR (Mortgage Market Review) will make it almost impossible to see the sort of explosion in mortgage lending that might trigger a bubble.
Banks will have to check that borrowers can afford their mortgage in much more detail than ever before and will have to test their ability to pay in the event that interest rates rise.
Interest only mortgages will almost cease to exist and will only be available where the lender is convinced that the borrower has a credible investment plan in place to repay the capital.
Almost all mortgages will require some advice and that will involve a closer look at affordability. Even some re-mortgages will involve a new examination of the borrowers’ financial circumstances.
Overall, the effect will be to prevent the gradual relaxation of lending rules that allowed lending to get out of hand last time round.
Thirdly, a significant (if not the only) driver of higher prices in London and the south east is the influx of overseas buyers who see London property as a safe place to park their money.
Ownership is secure, it’s likely to retain its value, you can readily raise a mortgage against it and it’s easy to sell if you want. For the wealthy from less stable countries, that’s an attractive combination.
But the effect is limited to a relatively small area where buyers can be sure that they can convert their asset in to cash (i.e. sell)easily. Now, property in Scotland may be a good investment, but no-one is expecting large numbers of overseas investors to use Scottish property as a safe haven for their money in the same way that they do in London.
For all of those reasons, the prospects of a house price bubble forming in Scotland are slim.
That’s not to say that prices won’t rise at all. We have seen prices rising sharply in Aberdeen, for example. But those increases are driven by economic fundamentals; rising employment and higher wages rather than speculation or an expectation of further rises in the future.