We're still living in a bubble

Governments might be able to stop house prices falling in the short term, but they can't support the bubble at the expense of everything else for ever.

When our property experts met at last year's roundtable, they were mostly convinced that property prices would be down significantly by the time they met again. They were mostly wrong.

Instead, once the first round of forced sellers had been disposed of, ultra-low interest rates allowed everyone else to hang on: mortgage payments fell by two thirds in the year to March 2009. Supply collapsed as a result (people preferred to stay put than sell at non-peak prices), so much so that even with the mortgage market more or less frozen, prices started to rise. This week, depending on who you listen to, they are no more than 10% off their late 2007/early 2008 levels.

So what next? Once again the panel is almost unified. Everyone except Stuart Law remains convinced that the only way is down by something in the order of 20%-25% over the next five years. Why? Read this week's roundtable and you'll see that we talk through everything from the low level of transactions to rising supply, the death of the first-time buyer and the ongoing banking crisis.

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But the real reason is pretty simple: our housing market is still a bubble.

But Britain isn't the only place still hanging on to its property bubble for dear life. In Spain, which doesn't even have the excuse of a supply shortage, prices are down just 15% from the peak and the price-to-income ratio is still 80% above its long-term average. That's despite prices doubling from 2000 to 2005, in spite of Spain's dismal fiscal position, and despite rampant unemployment. The reason? Same as here: government support for the sellers. In Spain, says Edward Chancellor of GMO in the Financial Times, supply has been constrained in much the same way as in the UK, due to low interest rates and "generous mortgage support for the unemployed".

The lack of proper housing crashes across the world might feel like good news. But it isn't. As Chancellor notes, unburst bubbles are "a potential source of vulnerability to the global financial system". If housing markets remain horribly inflated, how will it ever be possible for central banks to raise interest rates to anything approaching normal without causing a price crash and a second-round banking crisis? And if central banks can't raise rates, what happens to inflation?

Government policies might be able to stop house prices falling temporarily, "but they can't make the problems disappear". At some point governments will have to change policies they can't support one bubble at the expense of everything else for ever. When they do, things will get nasty again.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.