UK housing market bubble at 'risk of bursting'

The housing market is likely to bust within the next few years, a prominent economist and former advisor to Gordon Brown will warn today.

The housing market is likely to bust within the next few years, a prominent economist and former advisor to Gordon Brown will warn today.

The Financial Times reports David Miles, chief UK economist at investment bank Morgan Stanley, has written a report arguing that house price growth has been grounded in unrealistic expectations of double digit annual rises.

Mr Miles says it is only possible to explain the more than doubling of house prices in the past decade if people’s demand for housing has been heavily influenced by expectations that rapid price rises would continue.

Once house price rises come down below expectations, Mr Miles believes “significant” falls are likely.

The report concludes: “A sharp fall in real house prices is likely at some point in the relatively near future, though it could yet be one to two years away.”

Mr Miles, a visiting Professor of Financial Economics at Imperial College, University of London, is regarded as one of Europe’s leading financial experts and is also a non-executive director of city watchdog the Financial Services Authority.

In 2003 he was commissioned by Gordon Brown to review the mortgage market.

His report comes as banks including Abbey National offer home loans at five or more times borrowers’ salaries.

Mr Miles estimates that at present home buyers are expecting prices to continue rising by as much as 10% a year, compared with 2% in 1996.

He calculates that while just under half of the rise in prices is fuelled by population and income growth, a little over half the rise is driven by speculation that prices will continue to rise rapidly.

The Financial Times says that buoyant expectations of price rises, based on home owners’ experiences over the past five years, have fuelled demand and driven prices even higher.

But these prices are a “bubble”, which will deflate rapidly once price rises fail to meet expectations.

Mr Miles’ comments were echoed in May by Mervyn King, governor of the Bank of England.

Mr King added: “The level of house prices still seems remarkably high relative to average earnings or average incomes or anything else you could look at.”

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