Housing Bubble in UK

earnings-to-hosue-prices

Borrowing costs have reduced resulting in high assets prices including housing. Investment banks and hedge funds have borrowed money and invested in stocks. Individuals in the UK have borrowed and invested in properties. Both have taken advantage of low borrowing costs.

Asset bubble has also taken place as FIs are lending ever greater amounts. Example income to loan ratio have soared in past 30 years from 2.5 to 4.5 times eg. Banks in the 1980s in the UK were lending maximum of 2.5 times of income as loans.

Lets say if Mr and Mrs A have a combined income of £30k in 1980s, they would get a maximum loan of 30 x 2.5 = £75k.  In 2014 (after the crash) they can get 4.5 ie. 4.5x 30 = £135k.

As we all are aware most of the houses are bought with bank’s money (mortgages), people are inclined to pay more as a purchase price, if the banks are willing to lend more. If banks curtailed their income to loan ratio house price increase can easily be arrested, even reversed but I am not sure if a reversal will be a good idea !

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