(Bloomberg) – The UK property market is heating up quickly, and a mix of strong demand and double-digit price growth is raising fears that an unsustainable bubble is forming.

The pace of mortgage approvals is a third above its pre-pandemic levels, and housing could be heading into its busiest year since before the financial crisis, as buyers rush to take advantage of a tax reduction. But with affordability strained and lenders easing mortgage requirements, the signs are starting to worry some Bank of England policymakers.

The government’s tax exemption is only temporary, potentially creating a cliff and precipitating a slowdown towards the end of the year, just as employment support programs end. BOE deputy governors Jon Cunliffe and Dave Ramsden both said this week they were monitoring the housing market “carefully” amid booming conditions.

One of the risks is that banks will ease credit restrictions due to the surge in demand. Nationwide Building Society has started offering new mortgages that represent 5.5 times the income of first-time buyers, above the commonly used ratio of 4.5. If others do the same and tell regulators they need to adapt to the market, “we’re starting to see some danger,” said Neal Hudson, founder of Residential Analysts.

Still, demand could be buoyant after the tax benefit is phased out over the next few months, as the effects of the pandemic persist, especially the work-from-home culture that has fueled the desire for larger homes further away from home. urban areas.

The following charts detail what happened in one of the most turbulent times for the economy in modern history.

After more than a year of pandemic restrictions, residential real estate appears to be unscathed. Chancellor Rishi Sunak’s stamp duty cut, which saved buyers up to £ 15,000 ($ 21,200), started a fire under the market as other sectors of the economy suffered .

The increase in demand is visible in the number of mortgages and transactions, both of which have reached multi-year highs. Despite criticism that the stimulus was not needed, Sunak extended the benefit until October 2021, after its original March deadline.

In addition to the stamp duty effect, the pandemic has also triggered a shift in lifestyle choices, and the desire for larger properties is creating regional hot spots in the housing market.

This structural shift is happening globally, with the UK being one of 13 countries that have seen double-digit house price growth in the past year, according to broker Knight Frank LLP.

This prompts authorities around the world to pull on the levers to curb the rampant growth in house prices. Canada‘s banking regulator has tightened mortgage requirements in light of its own housing boom, and New Zealand’s central bank is also threatening to act.

Back in the UK, “there are quite a few people who are worried about what is going on with house prices outside of London,” said Marcus Dixon, head of research at LonRes, a research firm. real estate data. “We don’t mind a bit of growth, but we don’t want to crash. “

The latest figures from the Nationwide Building Society put price growth at nearly 11%. While this could be skewed due to the drop in activity during the UK’s first foreclosure a year earlier, values ​​are still on the downside. Data from the Bureau of Statistics puts the average earnings in the first quarter at 9%.

Fixed price

The mini-boom is a problem for those who struggled to climb the property ladder even before the pandemic. With most lenders requiring a down payment of one-fifth of the price, the average amount raised by new buyers for a mortgage rose 23% in 2020, according to figures from Lloyds Banking Group.

Affordability was already strained, particularly in London. Critics of Sunak’s stamp duty cut say it has added to the pandemic’s uneven fallout on young workers, a point noted by Cunliffe.

“It cannot be ignored that real estate booms shift wealth to existing and generally older owners and can therefore worsen intergenerational inequalities,” he said last month.

The discrepancy between those who can and those who cannot afford to buy a home is at the heart of the Conservative Party’s efforts to get more people up the housing ladder. The policy – “Generation Buy” – appeals to the uniquely British dream of home ownership as a stage of life and the primary means of accumulating wealth.

But while many people accumulated savings during the pandemic because they couldn’t go on vacation or eat out, it wasn’t the same for everyone. Young workers were disproportionately in industries most affected by lockdowns – such as retail and restaurants – leaving them out of pocket when they could try to save for a deposit.

The government has since introduced a guarantee program for mortgages at 95% of the value. But other loan criteria mean that it is not always easy to get these loans. And for those who do, 5% doesn’t give buyers much room above negative equity if home values ​​fall. The program also stimulates demand without doing anything for supply, increasing risk.

The risk of falling prices is particularly pronounced in London, which lags behind other regions, and even within the city there has been a large variation in demand.

Boroughs with some of the most expensive homes in the country had to contend with accounts as people fled the city center, while neighborhoods on the outskirts were in high demand. But there are signs that the wave of departures is starting to reverse, with demand increasing in cities across the country amid a rapid rollout of immunization.

As the UK takes a series of steps to control the spread of Covid-19, threats to the economy persist. While the housing rally still has some way to go, the unwinding of the stamp duty will come around the same time that government employment support ends. These could reveal the weakness of the labor market and increase unemployment.

“You have these extremes in people’s experiences,” says Yolande Barnes, real estate researcher at UCL. “Now, if you have it in the economy, you will have it in the housing market. “

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