First-time buyers spark renewed bubble fears

Housing bubble

Fears are growing that the property market is heading for a new bubble following news that 41% more first-time buyers took out a home loan in July 2013 compared to July 2012.

The Council of Mortgage Lenders said the 25,300 loans advanced to first-time buyers was also 5.4% up on the previous month of June.

The total number of loans advanced for home purchases also grew, rising to 57,400 – 9% on June 2013 and 21% on July last year; while buy-to-let loans also rose, to 15,200 in July 2013, up 12% on the previous month.

"Housing market activity is now clearly trending up, supported by strengthening consumer confidence and elevated employment, and fuelled by the Funding for Lending Scheme and the Help to Buy initiative," said Howard Archer, chief economist at HIS Global Insight.

"We are currently some way off any new housing bubble developing with activity still relatively limited compared to pre-crisis levels. Nevertheless, with housing market activity currently gaining appreciable momentum and new stimulus measures due to kick in at the start of 2014 (the "Help to Buy" mortgage guarantee scheme), it is something that policymakers need to keep a very close eye on.

"While an improving housing market is helpful to growth prospects, it is vitally important for stability and longer-term growth prospects that a new housing price bubble does not emerge."

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Archer believes that if the housing market continues to rapidly pick up over the coming months, the case for limiting or even eventually pulling the plug on the "Help to Buy" mortgage guarantee scheme that start in January 2014 will "look ever more compelling".

Meanwhile, the Bank of England has indicated that it will keep a close eye out for any house price bubble developing. As well as interest rate rises, it can also use other methods to try and cool an over-heating market, such as raising capital requirements on banks, making them scale back their mortgage offerings.

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But there is a housing bubble already and lasting, I'd venture; look at the average prices of properties in London. There may be evidence of a slowdown of late in the capital, but prices remain very high and beyond the reach of people on average wages for London.
Without debating on the relative merits/demerits of Help to Buy, the elephant in the room is the yawning gap between what most people can afford to spend on a mortgage and the prices of houses. Some have suggested coupling more high loan to value mortgage products with the growth of insurance products to cover these in the event of default.
One useful strategy is to encourage people to share mortgages. A company called Share a Mortgage is championing this approach: with more people on a mortgage, all barriers to entry are lowered and they should be able to access cheaper mortgage products.