Are we heading for a new housing bubble?

With ultra-cheap financing for mortgages but severely constricted supply, property prices could be on the rise again. Russell Lynch reports

After years shaking off the hangover of a debt-fuelled property boom, these are rare times for British housebuilders. Rescue rights issues and restructurings were the norm in the wake of the credit crunch as the mortgage market dwindled overnight. But now we have that rarest of things: a housebuilder emerging from the sick bay and preparing to dip its toe back into public markets.

Crest Nicholson's £500m float is the first significant initial public offering in the industry for a decade, and is likely to be followed soon after by the retirement builder McCarthy & Stone. A look at the FTSE 350 general housebuilders' index – up 32 per cent in the last year alone – explains why. Building on cheaper land bought since the crash is fattening profit margins without any significant rise in volume growth, share prices and dividends are rising, and lenders who supported the strugglers through the downturn are sniffing an exit.

Another prime mover is the Bank of England's Funding for Lending scheme, launched last August to allow banks to access ultra-cheap funding lines in return for growing net lending. The cash, albeit drawn down in small amounts so far, is finding its way far more quickly to the mortgage market than corporate credit. Lending rates are coming down, and the Bank's own credit conditions survey says banks and building societies are gearing up for a "significant" increase in credit availability during the current quarter.

The Government is also doing its bit to help the market with its NewBuy and FirstBuy schemes, to help first-time buyers bridge the deposit gap to get on the ladder as well as increase the availability of 95 per cent loan-to-value mortgage loans. But this influx of funds into the mortgage market is not being matched by an increase in supply of homes, according to the bosses of the country's two biggest housebuilders. Economics dictates that if supply fails to keep up with rising demand, the result will be rising house prices. So is the Bank of England at risk of fuelling another house price boom?

The figures are stark: in 2007 builders completed 170,000 homes, and in 2011, the last full year available, this fell to 109,000. This is barely 6,000 above the nadir touched in 2008, which saw the lowest year for completions since 1923. According to official estimates, we need 232,000 homes a year to be built to keep up with the formation of households. Despite the deepest recession since the 1930s house prices still cost more than five times average salaries, well above the long-term average of 4.2.

Mark Clare, Barratt Developments' chief executive, says: "The risk is that we continue to see very low production volumes and increasing demand, which would lead to upward pricing pressure." He adds: "At the moment the housebuilding industry is around 40 per cent down on where it was. It took a very substantial step down and there is a limit to how far we can grow. It could be 2020 before the industry is back to where it was. That is where the risk is."

Housebuilders and construction firms made savage job cuts during the recession, leaving the sector employing almost 400,000 less staff than it did in the autumn of 2007. Two years of transition in the UK's painfully slow planning system, which culminated in the adoption of a new national planning policy framework and a presumption in favour of sustainable development, has meanwhile seen halting progress on planning permissions for new homes. According to figures prepared by construction consultants Glenigan for the Home Builders Federation, there were 33,881 between July and September last year, up 17 per cent on a year earlier but still well short of the 60,000 per quarter needed to meet demand, or the 64,500 being granted on average during the boom years of 2006/07. An HBF spokesman says: "We know there is pent-up demand. What we can't do is allow the constraints of the planning system to push up prices."

Pete Redfern, Taylor Wimpey's chief executive, adds: "It seems extremely unlikely that the level of planning permissions is going to increase significantly, while as the economy recovers there will be untapped demand emerging. It is difficult to see how that is not going to lead to house price increases."

The Council of Mortgage Lenders forecasts a £15bn rise in mortgage loans this year thanks to FLS, taking the size of the market to £156bn. This is still vastly below the 2007 peak of £362bn, but Bob Pannell, chief economist, says the body is "more positive" about the UK housing market. "A key reason is that lenders currently face few funding pressures, in part reflecting the FLS," Mr Pannell says.

As rents push to record highs due to the previous loan shortage, the economic argument is also tilting in favour of buying, with FLS bringing down lending rates and NewBuy helping buyers get over the deposit hurdle. In the second week of January, there was the highest number of reservations on record since the scheme began in March, at 123.

Some property economists are more sceptical over the danger of rising prices: the argument is that a buoyant new build market – around 10 per cent of the total – could be offset by the slack in the much bigger second-hand market as homeowners sitting tight until now due to lack of equity seize the chance to sell.

Daniel Solomon, housing economist at the CEBR research body, said: "FLS will probably have an impact but not enough to make credit skyrocket. London will be strongest because it has the strongest local economic growth and links with emerging markets, although the flow of 'hot money' flooding into London after the Arab Spring is likely to abate this year."

Mr Solomon adds that banks are too bogged down fighting against the twin shocks of the financial crisis and the eurozone's woes to fuel a housing boom with a huge surge in lending. "Either of those would have been big enough on their own," he adds. "We are living in a different world." Buyers frustrated for years by an inability to get on the housing ladder – as well as the Bank of England's inflation watchers – will hope he's right.

Discover more property articles at Homes and Property
PROMOTED VIDEO
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidates on the verge of tears as they were ejected from the boardroom
Voices
New look: Zellweger at Elle's Women in Hollywood awards on Monday
voicesRenée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity, says Amanda Hess
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Sport
Christiano Ronaldo enjoys his opening goal
champions leagueLiverpool 0 Real Madrid 3: Ronaldo and Benzema run Reds ragged to avenge thrashing from their last visit to Anfield
Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
Arts and Entertainment
Sir Nicholas Serota has been a feature in the Power 100 top ten since its 2002 launch
art
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
News
Wilko Johnson is currently on his farewell tour
people
News
Let’s pretend: KidZania in Tokyo
educationKidZania lets children try their hands at being a firefighter, doctor or factory worker for the day
Life and Style
CHARGE BOOSTER: Aeroplane mode doesn't sound very exciting, but it can be a (phone) hacker's friend. Turning on the option while charging your mobile will increase the speed at which your phone battery charges
techNew book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
News
i100
Property search
Property search
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Year 1 Teacher

£90 - £120 per day: Randstad Education Hull: Randstad Education are recruiting...

Year 5 Teacher

Negotiable: Randstad Education Hull: Randstad Education is currently recruitin...

Early Years Teacher

£90 - £120 per day: Randstad Education Hull: Early Years supply teachers neede...

.NET Developer - .NET & SharePoint - Coventry

£35000 - £50000 per annum + Benefits + bonus: Ampersand Consulting LLP: .NET a...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?