This following post was written by Jamie Hunts. He writes for the Guernsey estate agents (Livingroom) that are based in the United Kingdom. If you’re interested in purchasing properties, then the article below may be right for you.
We are all familiar with the workings of how to make a bubble. You dip the wand into the bubble solution, blow on it gently and you have a bubble. However, if you keep on blowing the bubble is going to keep increasing in size until it suddenly bursts.
This is essentially how a property market bubble works. The value of real estate increases rapidly, until it reaches an unsustainable level causing the market to sharply decline, and with it losing lots of people a lot of money, which in turn causes knock on effects throughout the rest of the economy.
As you have probably deduced, it is not desirable to have a property bubble occur. So what are the odds of it occurring in the UK in 2014?
Apparently quite high according to a leading UK property website, who have forecast an increase in property price inflation of 1.5%, from 4.5% up to 6%. So what does this mean in real life terms? Given that the Central Bank interest rate is still fixed at 0.5%, which is designed to allow the public to borrow from banks at an affordable rate, more people are able to afford a first, or larger than before, mortgage. However the knock on effects of the financial crisis means there has been fewer new build housing projects than previous decades.
As such, it boils down to an increased demand for a not increased amount of property, the result of which means a sharp increase in property prices (standard demand and supply economics). Can we see how this is starting to look like the beginning of a bubble?
So what does this mean for you? Well there are a variety of scenarios that could occur or apply to you. Firstly, you either can’t afford to buy regardless of the inflation and interest rates or you are comfortable in the home that you already own. As far as prices go, you are unlikely to be affected negatively. If you own a home, the price may reduce as an effect of the bubble as a whole, but as you didn’t purchase at the inflated price you won’t be hurt too badly.
On the flip side, if you purchase a new property at an inflated price because you really want your own place and can’t wait for another year, then you are likely to get stung in the event of a bubble burst. Bubbles however are a great time to sell, especially if you live in one property and are able to sell additional properties. This will mean you are getting more money than the house is worth, while still having somewhere to live so you don’t have to pay inflated prices for a new home. If you do sell your only property during a bubble, it may be wise to hold off purchasing again until prices drop.
The final scenario that I am going to discuss is the Central Bank increasing the base interest rate. This would then mean an increase in mortgage interest rates, so less people could afford to purchase property. In turn this reduces the demand for property and allows prices to remain sustainable and prevent the bubble from growing or bursting.
If you are looking to purchase in 2014, make sure you take these market factors into consideration and be sure to speak with your local estate agent for further advice.
Photo Courtesy of james.thompson