Why the current house price inflation is more than just a "Bubble."

At the start of the pandemic last year, the property transactions collapsed by 50 per cent compared to 2019. Office for Budget Responsibility predicted a fall in house prices by around 8 per cent throughout 2020. However, what has happened since has been a complete reversal of what many analysts expected. House prices have since grown by 7.6 per cent, according to Nationwide. And analysts predict that house prices will increase by a further 5 per cent by the end of 2021.  

The current house price inflation raises fears of possible bubbles and prompts some analysts to call on the government to intervene to prevent the market from overheating. Policymakers were already worried about high house prices before the pandemic, especially as years of low-interest rates kept demand strong. But now, with billions of pounds of stimulus deployed by the government to fight Covid-19, along with changes in buying patterns as more people work from home, are turbocharging the market further.

So, why is the current house price inflation more than just a "Bubble"?  

Current house prices inflation is not just exclusive to the UK:

According to the wall street journal, the UK housing market boom is parallel to the rise in residential real estate worldwide from Amsterdam to Auckland. In the 37 countries that make up the OECD, house prices hit a record high in the third quarter of 2020. Prices rose by almost 5 per cent, the fastest in nearly 20 years. 

According to the Danish Central Bank, cheap financing and savings expanding during the pandemic have led to a surge in demand for homes.

House prices across the world have continued to rise despite some governments tightening control:

According to WSJ, regulators in China tried tamping down property markets to cool what one senior banking official referred to as a "bubble" to little avail. House prices in China were still up by 16 per cent compared to the previous year. In New Zealand, the authorities recently tightened mortgage lending standards, but the house prices still rose by 23 per cent in February compared to last year. Sydney has seen house price hit a record high, and banks like in the UK struggle to keep up with mortgage applications.

According to the Danish Central bank, unlike other housing market buoyancy periods, buyers have higher creditworthiness and higher deposits upfront on homes' purchase. This means that slight price correction will not lead to negative equity in homes for the banks and owners, making house prices more sustainable in the future. 

Actual demand and not just Speculation:

Economists suggest that home buying globally is driven by actual demand rather than Speculation like in 2008, which sent the world into recession. Families are looking to upgrade to larger properties in suburban areas as they work from home. The hot markets will cool naturally without broader damage as interest rates rise, and pent-up demand is met.

This highlights a fundamental shift in people's attitudes towards homes. Unlike the previous housing market, "bubbles" this is led by behavioural changes rather than Speculation of property prices going up and up. Individuals are not buying homes because they expect house prices to rise. They are buying or moving homes because of the changes like their work and circumstances.

According to Knight Frank international residential research, "There's been this almost global reset as people have taken a step back during lockdown periods and reassessed their lifestyle."

Does this mean house prices will continue to rise?

In short, "NO". 

According to Karsten Biltoft, assistant governor at Danish Central Bank. House price growth of 5 to 10 per cent annually is not sustainable in the long run. The housing market will slow at some point, but there is a fundamental shift in people's behaviours driving demand. As Garrington Property Finders put it, "there is enough momentum in the market to sustain it, with or without government stimulus. With so many people determined to move in 2021, at worst, things will be heading for a soft landing rather than a crash."