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We are in a housing bubble, claims economics professor | We are in a housing bubble, claims economics professor |
(about 9 hours later) | |
Most regions of the UK are already in a house-price bubble, according to an economics professor from Warwick University. | Most regions of the UK are already in a house-price bubble, according to an economics professor from Warwick University. |
Prof James Mitchell said house prices were overvalued when compared with incomes, raising the risk of a fall at some stage in the future. | Prof James Mitchell said house prices were overvalued when compared with incomes, raising the risk of a fall at some stage in the future. |
Of 13 regions in the UK, he said 10 were currently overvalued. | Of 13 regions in the UK, he said 10 were currently overvalued. |
However, most other economists believe property prices are still affordable, given very low mortgage rates. | However, most other economists believe property prices are still affordable, given very low mortgage rates. |
"The results raise the risk, although not the certainty, that house prices will fall," said Prof Mitchell, although he said it was difficult to say when that would be. | "The results raise the risk, although not the certainty, that house prices will fall," said Prof Mitchell, although he said it was difficult to say when that would be. |
"But a bubble it appears to be and we should all - householders, business people and policymakers alike - be alert to this risk." | "But a bubble it appears to be and we should all - householders, business people and policymakers alike - be alert to this risk." |
Prof Mitchell, the head of economic modelling and forecasting at Warwick Business School, used house price and incomes data from the UK's largest mortgage lender, the Halifax. | Prof Mitchell, the head of economic modelling and forecasting at Warwick Business School, used house price and incomes data from the UK's largest mortgage lender, the Halifax. |
He was previously a senior research fellow with the National Institute of Economic and Social Research (NIESR) for 12 years. | |
He defines a bubble "as a time when prices exceed fundamentals, or when price exceeds value". | He defines a bubble "as a time when prices exceed fundamentals, or when price exceeds value". |
'Breaking point' | 'Breaking point' |
According to his research, London is the most overvalued region. | According to his research, London is the most overvalued region. |
Scoring those regions on the likelihood of a bubble, he said there was a 93% probability that London is "in the grip of a house-price bubble". | Scoring those regions on the likelihood of a bubble, he said there was a 93% probability that London is "in the grip of a house-price bubble". |
Wales is the next most overvalued region, with an 83% chance of a bubble, followed by north-west England with 80%. The UK as a whole scores 77%. | Wales is the next most overvalued region, with an 83% chance of a bubble, followed by north-west England with 80%. The UK as a whole scores 77%. |
Prof Mitchell said Scotland and Northern Ireland were unlikely to enter a bubble phase, and the chances for eastern England were "evens". | Prof Mitchell said Scotland and Northern Ireland were unlikely to enter a bubble phase, and the chances for eastern England were "evens". |
He was particularly gloomy about the point at which interest rates rise. | He was particularly gloomy about the point at which interest rates rise. |
The Office for Budget Responsibility (OBR) currently expects that to happen in 2015. | The Office for Budget Responsibility (OBR) currently expects that to happen in 2015. |
Prof Mitchell said at that point there would be a risk that household and bank finances would be "stretched to breaking point". | Prof Mitchell said at that point there would be a risk that household and bank finances would be "stretched to breaking point". |
"This raises the spectre of falling house prices, negative equity, bad assets on banks' balance sheets and a return to the so-called great recession we have been so slowly emerging from," he said. | "This raises the spectre of falling house prices, negative equity, bad assets on banks' balance sheets and a return to the so-called great recession we have been so slowly emerging from," he said. |
'Warp speed' | 'Warp speed' |
Earlier this week the governor of the Bank of England, Mark Carney, warned about the potential for a housing bubble in the UK, during a speech in New York. | Earlier this week the governor of the Bank of England, Mark Carney, warned about the potential for a housing bubble in the UK, during a speech in New York. |
"There is a history in the housing market of moving from stall speed to warp speed," Mr Carney said. "We want to avoid that." | "There is a history in the housing market of moving from stall speed to warp speed," Mr Carney said. "We want to avoid that." |
However most economists believe the UK is still some way from being in a housing bubble. | However most economists believe the UK is still some way from being in a housing bubble. |
The amount of money being lent, and the number of housing transactions, are still way below the levels seen in 2007-08. | The amount of money being lent, and the number of housing transactions, are still way below the levels seen in 2007-08. |
According to the Halifax, the Nationwide, and the Land Registry, prices too are well below the record. | According to the Halifax, the Nationwide, and the Land Registry, prices too are well below the record. |
Low mortgage rates also continue to make property relatively affordable. | Low mortgage rates also continue to make property relatively affordable. |
Many believe that households will be able to handle a gradual rise in interest rates. | Many believe that households will be able to handle a gradual rise in interest rates. |
"We think there are good grounds to be optimistic that the vast majority of households will cope with a slow but certain transition to more normal interest rates," said Bob Pannell, the chief economist for the Council of Mortgage Lenders (CML), this week. | "We think there are good grounds to be optimistic that the vast majority of households will cope with a slow but certain transition to more normal interest rates," said Bob Pannell, the chief economist for the Council of Mortgage Lenders (CML), this week. |
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