The relative robustness of UK housing isn’t that surprising.

The relative robustness of UK housing isn’t
that surprising. Real mortgage interest rates
are at an all-time low and, if bond markets
are to be believed, set to remain far lower
than in the 1980s and 90s. Meanwhile, and in
direct contrast with the US, dwindling spare
capacity in the UK housing stock means
rents continue to outstrip income. After
twenty years of rapid rental growth and
falling real interest rates it makes little sense
to argue that purchase prices or mortgage
debt should revert to some historical “mean”,
relative to income.
The divergence between relative house prices
and relative GDP, comparing the UK with
the US, should make one question any
simple link between housing and the
economy – business cycles are driven by
more than just bubbles or busts in housing
markets.
Another implication is that spare capacity
matters for prices. If so, then it’s presumably
important that, on comparable measures,
there looks to be less spare capacity in the
UK (than in the US) not just in housing but
in other areas of the economy as well, both
within firms and in the labour market. This
suggests that, as with housing, wholeeconomy
price inflation will remain higher in
the UK than in the US and that interest rates
will have to rise sooner.

Category: Property News