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Opinion split over possibility of housing bubble


Opinion on whether the new Government-led scheme to get more people on the property ladder, Help to Buy, will cause a housing bubble has been split, as industry experts consider the likelihood of a rise in property prices.

Head of Lloyds Banking Group, Antònio Horta-Osòrio, has expressed his concern over the scheme, saying that unless the Government removes restrictions over planning, and boosts the supply of housing, there is a risk that prices could begin to rise fast. In an interview with the Financial Times, Mr Horta-Osòrio said: “It is important that planning permits, building authorisations and social housing projects are (liberalised) so that the increase in (mortgage) transactions does not lead to a substantial increase in house prices”.

However, EY Item Club, one of the leading UK economic forecasters, has said that there is only an ‘extremely slim’ chance that we will see a housing bubble as a result of increased activity within the mortgage market.

EY Item Club predicts that the price of the average UK home will rise by 3.5pc this year, and then a further 6.6pc next year.

A housing bubble would be caused as a result of demand outstripping supply, as more and more people are able to afford to buy a home. Once this happens, the prices of houses on the market would be raised to reflect the increased level of competition, and there would be a situation where only the richest could afford to buy a home, effectively rendering the scheme useless.

However Peter Spencer, chief economic adviser at the EY Item Club, dismissed fears of a bubble occurring. He said: “Despite the recent criticism of these initiatives (Help to Buy, Funding for Lending), the chances of seeing another housing bubble are extremely slim.

“House prices and transactions are only just recovering from the credit crunch and will be paltry in comparison to those of a decade ago. Household finances are also in a much better shape, with debt to income ratios now at sustainable levels”, he continued.

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