AFR Article: Wednesday 9 June 2021. Page 40

London | The UK property market is heating up rapidly, and a mix of surging demand and double-digit price growth is causing concern an unsustainable bubble is building.

The pace of mortgage approvals is running more than a third higher than its prepandemic level, and housing could be heading for its busiest year since before the GFC as buyers rush to take advantage of a tax cut. But with affordability stretched and lenders easing mortgage requirements, the signs are starting to worry some Bank of England policymakers.

The government’s tax holiday is only temporary, potentially creating a cliff edge and precipitating a slowdown toward the end of the year, just as job support programs end. Bank of England deputy governors Jon Cunliffe and Dave Ramsden both said this week that they are watching the housing market ‘‘carefully’’ amid the boom conditions.

One risk is that banks relax lending restraints because of the wave of demand. Nationwide Building Society has started offering new mortgages that are 5.5 times the incomes of first-time buyers, above the 4.5 ratio commonly used. If others follow suit and tell regulators they need to adjust to the market, ‘‘we do start to see some danger,’’ said Neal Hudson, founder of Residential Analysts.

Still, demand could be propped up after the tax perk is phased out in the coming months as pandemic effects linger, particularly the work-from-home culture that has fuelled a desire for bigger homes outside urban areas.

After more than a year of pandemic restrictions, residential property looks unscathed. Chancellor Rishi Sunak’s stamp-duty cut, which saved buyers as much as £15,000 ($27,300), lit a fire under the market as other parts of the economy suffered.

The surge in demand can be seen in mortgage and transaction numbers, both of which reached multi-year highs. Despite criticism that the stimulus was not needed, Mr Sunak extended the perk to October past its original deadline of March.

In addition to the stamp duty effect, the pandemic also sparked a shift in lifestyle choices, and the desire for bigger properties is creating regional hotspots within the housing market.

That structural shift is happening on a global scale, with the UK one of 13 countries that had double-digit house price growth in the past year, broker Knight Frank LLP says. That’s prompting authorities across the world to pull levers to put the brakes on rampant house price growth. Canada’s bank regulator has tightened mortgage lending requirements in light of its own housing boom, and New Zealand’s central bank is also threatening to act.

Back in the UK, ‘‘there are quite a few people that are worried about what’s going on with house prices outside of London,’’ said Marcus Dixon, head of research at LonRes, a property data company. ‘‘We don’t mind a little bit of growth but we don’t want a crash.’’

The latest figures from Nationwide Building Society put price growth close to 11 per cent. While that may be skewed because of the slump in activity during the UK’s first lockdown a year earlier, values are still on a tear. Statistics office data puts average gains in the first quarter at 9 per cent.

The mini-boom is an issue for those who were struggling to get on the property ladder even before the pandemic. With most lenders requiring a 20 per cent down payment, the average amount raised by new buyers to get a mortgage rose 23 per cent in 2020, Lloyds Banking Group says. Affordability was already stretched, particularly in London. Critics of Mr Sunak’s stamp duty cut say it added to the unequal fallout from the pandemic on younger workers. ‘‘One cannot ignore that housing booms shift wealth towards existing and generally older homeowners and can therefore widen intergenerational inequity,’’ Mr Cunliffe of the Bank of England said last month.

The divergence between those who can and those who cannot afford to buy a home hits at the heart of the Conservative Party’s push to get more people on the housing ladder. Its ‘‘Generation Buy’’ policy appeals to the British dream of home ownership as the main way of accumulating wealth.

But while many people built savings in the pandemic because they couldn’t take holidays, young workers were disproportionately in industries most affected by lockdowns, such as retail and restaurants, leaving them out of pocket at a time when they might be trying to save for a deposit.

The government has introduced a guarantee program for 95 per cent loan-to-value mortgages. But other criteria mean it is not always easy to get those loans. And for those who do, 5 per cent does not give buyers much of a margin above negative equity if home values fall. The program also stimulates demand without doing anything for supply, increasing the risks.