Is the house bubble finally set to burst?

While the UK economy may have endured a period of decline over the last 18 months, the housing market has continued to perform impressively (with an admittedly restricted rate of growth).

This may be about to change, however, with home-owners fearful that house prices may finally be about to plummet against a backdrop of rising inflation and a potential interest rate hike.

Are these fears justified, however, and should we expect the housing bubble to finally burst in the UK?

What do the numbers say?

According to a recent survey by the Halifax, one-in-five (20%) of British adults said that they expected house prices to fall during the next year. This highlights just how far confidence has fallen in the UK economy, with the latest data revealing the weakest reading for customer expectations since October 2012.

Interestingly, it is home-owners under the age of 25 who are considered to be the least optimistic, as the effects of rising inflation and stagnate real wage growth create a cumulative effect in the minds of consumers. With less disposable income to spend, householders have a negative perception of the economy and many cannot see the property market sustaining growth in the current climate.

This feeling of negativity has been exacerbated by the prospect of the forthcoming Bank of England (BoE) policy meeting, which will take place next week. It is hotly anticipated that the base interest rate of 0.25% will be increased for the first time in a decade at this meeting, sending the cost of borrowing soaring and triggering a further hike in the cost of living.

A perfect storm for home-owners and consumers in the UK

Without doubt, this macroeconomic climate is creating a perfect storm for home-owners and consumers in the UK, with concerns about declining property value and negative equity abound. Not only this, but of the 535 mortgage holders questioned by Halifax, 33% were concerned about their ability to meet repayments in the wake of a proposed interest rate hike.

With these points in mind, it is little wonder that home-owners are growing increasingly concerned about the state of the economy and the trajectory of house prices in the UK. The question that remains is whether the extent of these concerns is justified, as while the rate of growth in the market may have stalled, house prices have yet to experience a sustained decline.

Of course, the concern is that the rising cost of borrowing will impact heavily on demand, causing prices and values to fall incrementally in the months ahead. So even with online agents such as Hatched reducing the cost of actively selling real estate, the increased cost of borrowing will automatically prevent some aspiring buyers from making their move.

The last word

Ultimately, the biggest takeaway here is the declining level of consumer confidence, with households finding their disposable income squeezed and willingness to spend negatively impacted.

This not only reduces the amount of money that is reinvested into the economy, but it also creates a negative mind-set that could last well into 2018 and beyond.