When will the UK's house price bubble burst?

·Personal Finance Columnist
·7 min read
The property market is being propelled onwards by an imbalance of supply and demand. Photo: Getty Side view of a businessman wearing a bike helmet and casual businesswear, riding a bike through a residential district in Newcastle-upon-Tyne on his commute to work.
The property market is being propelled onwards by an imbalance of supply and demand. Photo: Getty

Our passion for property has been impressively steadfast in the face of a lot of adversity over the past few months.

While inflation has pushed costs up to eye-watering levels, interest rates climbed, and house price rises forced people to take on staggeringly large loans, they didn’t skip a beat.

The most recent figures for May show house prices up 12.8% – or £32,000 in a year.

There’s a broad consensus that this can’t last, and that eventually prices will ease off, and may fall.

The question is just how much longer they’ll keep rising, and exactly what will happen when the bubble bursts.

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Right now, the market is being propelled onwards by an imbalance of supply and demand.

Rightmove (RMV.L) figures show that there are a quarter more buyers than the same time in 2019 and 40% fewer sellers. It means more buyers are still chasing fewer properties.

In the Royal Institution of Chartered Surveyors (RICS) report for June, 50% of agents said that on average houses worth less than £500,000 were still selling for more than the asking price. So the thing that’s going to bring an end to runaway price rises is a shift in this balance of demand.

House standing inside fish bowl on wooden surface.
The question is just how much longer property prices will keep rising, and exactly what will happen when the bubble bursts. Photo: Getty

That’s not going to happen in a hurry, because there’s so much pent-up demand. People have been hunting for months, and many have moved into rental accommodation in desperation.

It means that when a property comes onto the market, we don’t need brand new buyers to snap them up, estate agents already have books full of them.

However, we have started to see the first signs of movement. The Rightmove figures show that the number of buyers has dropped back 7% in a year and the number of sellers has risen 13%.

The RICS survey includes comments from a number of estate agents, who overwhelmingly reported that inflation was putting buyers under pressure, and that they were getting increasingly cautious.

They also said more sales were falling through as either the buyers or their mortgage lender felt they were overpaying for property.

Watch: Will UK house prices ever fall?

Read more: Is this the beginning of the end for rising house prices?

Meanwhile, the Bank of England reported that an increase in the number of properties on the market meant house price inflation was starting to slow in some areas between April and June, and that mortgage approvals in May were slightly below the pre-pandemic average.

Approvals are a useful measure of what’s likely to happen to demand over the coming months.

There are also signs that bidding wars are starting to ease off slightly at the top of the market. RICS reported that properties worth more than £1m, were selling (on average) for less than the asking price.

Price dips tend to be more exaggerated at the top of the market, so it’s worth keeping an eye on the direction of travel.

A general view of estate agent boards outside a property in Staines-upon-Thames in Surrey. Picture date: Monday January 10, 2022. (Photo by Steve Parsons/PA Images via Getty Images)
More sales are starting to fall through as either buyers or their mortgage lender feel they are overpaying for property, according to a new survey. Photo: Steve Parsons/PA via Getty

Given the enormous pressures on the market, these are relatively subtle movements.

However, there are a couple of reasons why demand remains so strong.

Partly it’s the fact that the alternative is so miserable. Runaway rents continue, and are up 11% in a year, according to Zoopla.

The most recent RICS report found that most agents think rents will keep rising over the next 12 months, so this level of support for the property market isn’t going anywhere.

Meanwhile, although interest rates are rising, they’re still at historically low levels. Before the financial crisis, such a low Bank of England base rate was unheard of, 10 years earlier, rates were around 5% and 10 years before that they were over 10%.

Given that three-quarters of mortgages are on fixed rates, owners are also insulated from interest rate rises until their deal expires. Of course for new buyers, each rate rise means higher mortgage payments, but not dramatically so at this stage.

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The jobs market is also doing an incredible job of holding the property market up. Unlike last time we had inflation at this level, unemployment remains very low — at just 3.8% — and there are still around 1.3 million job vacancies.

People feel secure enough in their jobs to take on more debt and commit to a mortgage.

For there to be a dramatic change in property prices, this picture would need to alter substantially.

The ongoing squeeze could eventually hit a tipping point. There could come a time when higher house prices, bigger mortgage costs, and rising bills push prices out of reach for so many people that sales dry up.

Members of the public take a break in the sunshine outside The Bank of England in London on June 16, 2022. - The Bank of England on Thursday hiked its main interest rate for a fifth straight time, as it forecast British inflation to soar further this year to above 11 percent. (Photo by CARLOS JASSO / AFP) (Photo by CARLOS JASSO/AFP via Getty Images)
Although interest rates are rising, they’re still at historically low levels. Before the financial crisis, such a low Bank of England base rate was unheard of. Photo: Carlos Jasso/AFP via Getty

Even if buyers remain committed, mortgage lenders could get cold feet. Their appetite for lending may shrink over concerns about the economy, so they raise the bar on affordability, and too many buyers fall short.

Another hike in energy costs in October could prove the tipping point.

However, if it happens this way, we’re more likely to see a gentle easing off of price rises rather than a bubble bursting.

House price falls are more likely if the UK falls into recession. If the economy hits tougher times, this could mean difficulties for the jobs market and a drop in confidence, which tips the balance on buyer sentiment.

People would be worried about taking on bigger and more expensive loans, and may decide it’s not the time to buy a property. Meanwhile, some of those who have already overstretched themselves could lose work, and as a result be forced to sell up, pushing up supply and depressing prices even further.

Read more: First-time buyer prices and rents jump as mortgage costs up 22%

Recessions often go hand-in-hand with price falls, as seen during the financial crisis in 2008 when unemployment spiked and property prices fell 20%.

There are plenty of commentators who are predicting a recession is imminent. However, it’s not guaranteed.

Right now, the Bank of England is forecasting a downturn at the end of the year, followed by a period of no growth — which would technically avoid a recession.

There are still those who argue that even if we do get a recession, the fact that we’re starting with low levels of unemployment and high levels of vacancies could mean a jobs crisis is avoided so house prices could stagnate rather than fall.

As yet there’s no definitive answer as to when – or even if – the property bubble will burst, but it is likely the rate of house price inflation will start to ease off sooner rather than later and that the end of the year could prove pretty miserable for the property market.

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