UK Housing : Watch out for the cracks / Economist

looks like the "magic roundabout" of ever increasing home prices will lose its magic soon.....

sieht ganz so aus als wenn die phase stetiger wertzuwächse im immobiliensektor dem ende entgegen steuert.....

The boom has built upon itself, which is why it will not last

..The past decade will be remembered not just for Mr Blair's domination of British politics but also for the most sustained housing boom in post-war history. After the slump of the early 1990s, the market turned in early 1996, a year before Labour won power. In the 11 years since then the average house price has risen by 240%, according to the Nationwide index; in real terms it has increased by 155%. In contrast, the big upturn in the 1980s lasted for seven years, and real house prices rose by 80%.

Two years ago the long boom seemed to be petering out. House prices rose by only 2% in the 12 months to August 2005. But following an interest-rate reduction that month, the market revived. House prices are now rising by 10% a year, close to the average growth of 12% in the past decade. In London and Scotland they have surged by around 15% since early 2006.

The resilience of the housing market has stretched already taut valuations. One yardstick used to assess affordability is the ratio of average house prices to average earnings, which captures whether housing is within reach of typical buyers. This ratio is now much higher than at its previous peak in 1989 (see chart).


Yet this indicator has been flashing red for some time and the market has continued to advance. Home-buyers have been swayed by another gauge of affordability: the cost of servicing a new mortgage loan in relation to their take-home pay. This has been heading up but, unlike the ratio of house price to earnings, it remains below its previous peak.

The housing boom has been built on cheap credit. The conquest of inflation in the 1990s transformed the outlook for interest rates, which dropped in 2003 to a 48-year low. In real terms they also fell, thanks to a glut of global savings as thrifty Asian economies and oil-exporting countries ran big current-account surpluses.

These favourable influences have supported housing markets around the world. The past decade has seen an extraordinary synchronised surge in house prices. The number of countries affected and the scale of the rises have been unprecedented.

The British market has also been supported by a pick-up in adult population growth caused by rising immigration and longevity. Along with this demographic impetus, more and more people are choosing to live alone. As a result, the number of extra households forming each year in England, which averaged 135,000 between 1991 and 2001, has risen to 200,000 since 2001.

Official projections published in March forecast that the rate would average 223,000 a year over the next 20 years.

While the rate of household formation has risen, the number of new homes being built has been surprisingly low. Far from rising in response to the thriving market, the rate of completions initially fell, reaching just 130,000 in England in 2001, the lowest since 1947. Since then the supply of new dwellings has picked up, to 160,000 in 2006. However, the rate remains inadequate given the growth in households.

>here is another chart that shows a higher number
>dieser chart zeigt ne deutlich höhere anzahl

The sheer tenacity of the British housing boom has vindicated those who have kept the faith. Among the believers in property are buy-to-let investors, another new force in the market. By the end of 2006, they accounted for 9% of the total value of mortgages, up from 2% five years earlier. Such investments are now often seen as a more reliable way to build up a retirement nest-egg than pensions.

>with a negative yield......what a "conservative" way to retirement......
> mit einer negativen mietrendite......? was für ein konservativer weg zur altersvorsore...

Yet there are good reasons to doubt that the market will go on rising for much longer. Any imbalance between new households and new homes should be reflected in rents. But the market is also overvalued when house prices are compared with rents. According to the OECD, the ratio of house prices to rents is nearly 70% higher than its average since 1970—well above the peak it reached in the overheated market of the late 1980s.


The danger is that the boom has built on itself to a point where it no longer rests on firm foundations. Residential rental yields are now below the cost of borrowing, which means that landlords are relying on house-price gains to make new investments pay off. ....