The past few months have seen news story after news story about the possibility that the United Kingdom’s housing market is in a bubble that is about to burst. Without a doubt, it has cause worries and apprehension. But to the everyday person, it may not be clear how the changes to the housing market may affect them.
Just recently, Sir John Cunliffe, deputy governor at the Bank of England, expressed his apprehension that the UK housing bubble risks will destabilize the economic recovery on going in the country. But the question remains the same – will it really affect you? Here’s how the risk of a housing bubble in the UK affects you.
Housing bubble is a term that gets thrown around a lot, often in panicked tones. In simple language, it means that housing prices suddenly fall after rising faster than the rate of inflation of the rise of people’s incomes. When the prices of housing get too expensive for most people to afford, the housing bubble bursts, which causes housing prices to fall and can lead to the collapse of the real estate market. The trouble can spread to the rest of the economy.
What has triggered fears of the United Kingdom’s housing bubble popping is a drop in the amount housing prices are raising each month. According to the Telegraph, the month of July saw the smallest rise in housing prices in the 15 months previous to it. This fact does not automatically mean the housing bubble is going to burst, but it is a worrying sign. The BBC announced that the average price of a home or flat in the United Kingdom is now at a record £247,000 as of October 2014, despite the fact that the rise in housing prices is being to falter.
The rising prices of housing in the United Kingdom have not been matched by a similar growth in worker’s wages and inflation, making it harder for you to buy a house or flat. According to Business Insider, the ratio of housing prices to people’s earnings has risen to over five times. It hasn’t hit that level since the financial crash in 2007. Ideally, you should spend only 25% of your gross monthly income on housing expenses. During a housing bubble, it is very easy to exceed this percentage and can be a cause of concern especially if you have taken other personal loans from financial institutions like Clydesdale Bank.
When you spend a greater portion of your monthly income on housing, you will be forced to pay for other expenses using your credit cards. Not only will it increase your debt as the amount of interest also increases each month, but the effect is much worse. It digs you into an even bigger hole in the long term. If the housing prices suddenly drop, you may end up owing more money on your house than it is now worth, especially if you have an adjustable-rate mortgage.
A housing bubble is so much more dangerous than a simple increase in property prices. This is simply because there is a greater chance for the prices/market to suddenly crash — leaving most homebuyers facing a huge mortgage payment and negative equity. So what should you do? For one, you do not need to rush to sell your house or run out and buy a new one. But you should keep an eye on your housing expenses compared to your income and try not to overextend yourself. At the end of the day, you have to ensure that you do not find yourself in a deeper hole compared to the time when you started.