There have been many (major) publications as well as front cover stories asking the same pointed question: Is this property market a bubble?
Many investors and economic commentators are also raising the warning flag, too. So it’s pretty natural that investors are asking questions.
But at the risk of spoiling the suspense: No, this is not a property market bubble.
You see, almost every bull market is followed by a bear market (and vice versa).
But The Signs Aren’t There
The property market doesn’t contain the two factors present in every genuine financial bubble: sky-high valuations and wild-eyed optimism.
Sure certain areas of London have increased 10% year on year, and pent up demand from credit worthy buyers who were denied access to finance post 2007 have tipped the scales…but make no mistake about it, we are far from the 25%+ yearly increase that we witnessed in the early ‘noughties’
So while prices are increasing, valuations are nowhere near them.
The other major indicator of a bubble is sentiment. For true believers at the time, buying bricks and mortar represented “a New Era” and property was a seemingly can’t-lose proposition.
- 125% Loan to Values
- NINJA & “Liar Loans”
- Surveyors getting “back-handers” especially on new build properties
- Interest only mortgages
- Same day remortgage or “daylight bridge”
- Surveyors valuing on perceived equity
- Borrowers getting a mortgage with tarnished credit
But this kind of behaviour just isn’t apparent today.
Yes, indices show that ordinary investors and buyers are moving back into property. But that hardly means the market is a bubble.
You see, what a lot of editors don’t seem to grasp is that, historically, everyday novices or speculative property investors are right most of the time. They are usually in for bull markets and out for bear markets.
And when they get it wrong it is at the extreme: being too pessimistic at market lows post 2007 and too enthusiastic at ‘market tops’. So we should be looking for signs of euphoria among ordinary investors.
But I don’t see it right now.
Most property investors are moving into property not because they see nothing but blue skies ahead but because they are earning nothing in cash and next to nothing in stocks and have just clocked onto that property is now the preferred game and back in vogue. And most of the market is just looking as they want somewhere to live.
Maybe they are sticking their necks out a bit? And there’s nothing wrong with a bit of prudent risk-taking.
But don’t buy the fear stories that are circulating.
Yes, the market can drop off at any time for reasons we can’t foresee.
But are we in a property bubble right now? Should you buy before prices sky rocket? Before the winners of the Budget park their funds in property and prices soar?
Absolutely not. Yes do your due diligence as prices are starting to creep up, and discounts disappear. But yet, we have neither the high valuations nor the overly optimistic sentiment to make that case. So while we are certainly well into this new property cycle it still has a lot of room to run.