UK Housing Boom Leads The World

Rocketing house prices are a global affair, but the UK leads the developed world when it comes to housing booms, as our global survey reveals.

Unless you're a hermit living in a cave deep in the mountains, you'll have heard about the UK housing boom which has lasted more than a decade. (Even if you do live in an isolated cave, you've probably had a visit from a local estate agent, keen to market your home as an `eco-friendly, one-bedroom studio grotto with stunning views'!)

For the record, UK house prices have risen uninterrupted every year since 1996, according to Halifax, Britain's biggest mortgage lender. In fact, house prices have been rising strongly in almost all developed nations between 2001 and 2006, as confirmed by a new survey from Halifax. However, as you'll see from the table below, the UK has led the way, with only Spain pipping us at the post among the eleven eurozone countries:

International housing trends

UK house prices versus the eurozone, 2001 to 2006

Sources: Halifax and European Central Bank

With the price of the average British home increasing by 90% in the past five years (a rate of almost 14% a year compounded), only Spain beats the UK among the eurozone countries, with prices doubling over this period. However, Spanish house prices have gone into something of a slump recently, so it's unlikely to hold onto the top spot for much longer.

Then again, while house prices are looking decidedly fragile in France and Ireland of late, UK property continues to hold its own, despite five interest-rate rises in a year. How much longer UK house prices will avoid `financial gravity' is anyone's guess!

Why have house prices fallen in Germany?

Uniquely in the eurozone, German house prices actually fell by a twentieth (5%) over the past five years. House-price falls, even over long periods, are a fairly common occurrence in Deutschland. Why is this?

Having spent quite a lot of my youth in Germany (care of the British Army of the Rhine), I have some understanding of the German housing market. For example, only about four in nine Germans (45%) own their own homes, in marked contrast to the UK, which has 70% home-ownership and 30% private/social renting.

Traditionally, Germans favour renting over buying, thanks to modest rents, the relative difficulty of raising a mortgage, and a deeply held national aversion to debt (partly caused by the economic disaster of the Weimar Republic). Most German homeowners either inherit properties from family members or buy when they are older and financially secure: typically in their forties and after saving a hefty deposit. Nevertheless, making money from property is alien to our German cousins, which sets them apart from the rest of Europe.

Now let's compare European house-price trends over two and one years:

UK house prices versus the eurozone, 2005 to 2006

Sources: Halifax and European Central Bank

Again, the same five countries (Spain, France, Belgium, Ireland and the UK) pop up in the first five slots. However, the UK slips from second to fifth place, having been leapfrogged by France, Belgium and Ireland. This is probably because our housing boom has gone on for far longer and thus is losing steam faster than others in the eurozone. Still, a 30% return in two years (a yearly rate of 14%) is well ahead of the post-war average of around 8.5% a year, so the UK is still firmly in boom territory.

UK house prices versus the eurozone in 2006

Sources: Halifax and European Central Bank

The UK just misses out on the bronze medal, taking a respectable fourth place behind Belgium, France and Spain, and one place ahead of Ireland. With a yearly increase of 13%, the UK beats the eurozone average (8%) yet again.

So, with the exception of Germany (and, to a lesser extent, Portugal and Austria), strong house-price rises have been a Europe-wide trend since 2001. But how do house prices and owner-occupation rates vary across the Continent? Let's select a few countries to compare and contrast:

Average house prices in 2006

Sources: Halifax and European Central Bank

As you can see, UK house prices are more than twice those in Finland, and almost a quarter (25%) higher than those in Spain. Nevertheless, they are lower than those in Ireland (whose amazing housing surge is now abruptly going into reverse) and the Netherlands, where population density is even higher than our own.

Now let's turn to...

Home-ownership levels

In general, the higher the rate of owner-occupation, the faster house prices have increased in recent years. For example, Spain's home-ownership rate is 82% and it tops the eurozone for house-price rises over two and five years. At the other end of the scale, Germany's low rate of owner-occupation has translated into poor, even negative, returns from domestic property this millennium.

Now let's throw our net even wider by comparing the UK with three other world powers: Australia, Canada and the poster boy of capitalism, the good ol' US of A:

UK house prices versus Australia, Canada and the US, to Q1 2007

Sources: Halifax and Datastream

The UK takes top honours, as our house-price rises easily outstrip those of Australia, Canada and the US over one, two and five years. What's more, house prices are significantly higher in the UK, perhaps because space is at a premium over here, whereas the other three massive nations have huge areas of undeveloped land to expand into.

A warning from across the Atlantic

It's important to note that the US housing boom is well and truly over, at least for the immediate future. Prices fell by 1.3% in the year to 31 March 2007 and have worsened since then: they are down 3.2% in the year to 31 July. This is the first nationwide housing decline experienced by the US since the Great Depression of the 1930s, so it's come as a shock to those Americans who believed that house prices go only one way: upwards.

Alas, careless lending by US mortgage banks has backfired spectacularly, with house repossessions and mortgage arrears soaring in 2007, particularly among borrowers with less-than-healthy credit records. This has forced lenders to tighten up their lending criteria and raise borrowing rates, leading to a slump in housing sales and mortgage borrowing, and creating a global credit crunch. All of this has had an adverse affect on US house prices, particularly in areas where values have climbed the most.

With house-price growth weakening in Spain, France and Ireland, and falling across the US, what's propping up UK house prices? Those with vested interests in property claim that historically low interest rates have created a `new paradigm' for UK housing. So, why haven't prices stalled as rates have climbed and borrowing has become more expensive over the past year?

Finally, although I've been pessimistic about UK house prices for some time, increasingly over the last two years, I'm now supremely confident that we're in for a few tough years to come. Just as Icarus flew too close to the sun and then crashed and burned, UK property has climbed too high and is riding for a nasty fall. Please assume the crash position and brace yourselves for a rough landing!

More: House Prices Look Fragile | Property Prices Are Schizophrenic | Shrink your repayments with the Fool's award-winning, no-fee mortgage service.

Editor's note: As a property `bear', Cliff sold his house in spring 2005 and has been renting since then. His gloomy house-price predictions have yet to come true, so don't lose too much sleep over them just yet!