The UK Housing 'Bubble' Is Deflating

UK house pricesUK Land RegistryClick to enlarge.

The Bank of England released new figures Wednesday providing more evidence that fears of a house price bubble in have been overblown.

Property prices in the UK have risen sharply since hitting post-crisis lows in 2011. Over the past year alone prices have risen by 7.2% across the country, with London prices up an astonishing 18.4%. Much of this is due to deferred demand from the crisis, with many people putting off home moves while the economy was weak, and over-enthusiasm that we could be returning to the halcyon days of the pre-crisis housing market boom.

However, September saw a reversal of this trend with a modest monthly fall in prices and new data from the Bank of England suggests there may be further weakness to come.

The number of loans granted against dwellings in September fell to 101,008, down from 105,816 in August. The value of mortgage loans over that period fell from £10.3 billion to £10 billion, with remortgages falling by a similar amount.

The slowdown should come as little surprise. Despite a short-lived pickup in the middle of the year, the number of home loans granted in the UK has been in decline since the start of the year. This was initially attributed to the market’s response to tighter lending standards imposed under the Financial Conduct Authority’s Mortgage Market Review, which came into effect in April.

Under the regulation, lenders are responsible for assessing whether a customer can afford the loan they are offered at average interest rates, and banks are required to verify the customer’s income before the loan can be granted. (Previously, buyers simply stated their own income with little verification.) The regulator has subsequently been backed up the Bank of England’s own Financial Policy Committee, and that committee has been given the power by the chancellor to place limits on loan-to-value and debt-to-income levels in residential mortgage lending if it sees fit.

The gradual cooling is precisely the kind of impact that the new regulation is supposed to lead to as tighter lending standards prevent market over-enthusiasm becoming self-fulfilling. However, they cannot address underlying mismatches between supply and demand in highly sought after areas of the country such as London. Nor do they help buyers overcome the rising affordability problem — house price growth is outstripping wage rises.

As the Bank of England put it earlier this month:

It is not the FPC’s role to control house prices, nor can it address underlying structural issues related to the supply of houses. Its role, as set out by Parliament, is to manage risks to financial stability, including from the build-up of unsustainable levels of leverage, debt or credit growth. The recommendation in this statement will allow it to fulfil that role in relation to the housing market.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.