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There is a real danger of a house price bubble in London. Discuss - Essay Example

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It is believed that economic crises stimulate their occurrence as the effects of these phenomena are felt extremely sharply when the economy shrinks. Price bubbles are also…
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There is a real danger of a house price bubble in London. Discuss
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Download file to see previous pages This gives possibility to assume that the house price bubble already exists in London and threatens the local real estate market.
To understand how dangerous a house price bubble is it is necessary to clarify its definition. A house price bubble is a type of economic bubble – “trading in high volumes at prices that are considerably at variance with intrinsic values” – on the real estate market. (King R. et al, 1993). Housing market bubbles are more critical than stock market bubbles. While equity price busts occur on average every 13 years, last for about 2,5 years, and result in nearly 4 percent GDP loss, the housing price busts are less frequent, however they last almost twice longer and lead to twice larger output losses (IMF World Economic Outlook, 2003). Real estate markets involve longer boom and bust periods, according to the recent research (Ikhomov N., Yavas A., 2012, 508-535).
It is reported that “house prices in London have fallen for the first time in nearly four years, and will continue to do so, according to a leading property market barometer.” (White A., 2014). The longest period of positive sentiment was recorded yet in January 2011 by the Royal Institution of Chartered Surveyors, and since then a drop in values in the capital was finally reported. In October 2014, the 12 month report predicted house price rise: 2,1 pc for the UK regions and 1pc for the capital. (White A., 2014).
“A chorus built for rate rises and special intervention in the mortgage market. Now the alarm calls are fading. A foreign capital flood has receded in London, home-loan approvals are down and house price inflation is easing. Bubble fears were premature. The talk of danger was spurred by fast annual house price rises – especially in London, where the annual increase in prices was 20.7 percent in the third quarter, based on data from mortgage lender Halifax. The national picture was less frothy, with an annual gain of 9.6 percent.” ...Download file to see next pagesRead More
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