OPINION: The thing with property bubbles is that they burst

The rule of thumb in our industry is that when prices accelerate hard, they subsequently hit a wall and crumble. The thing with property bubbles is that they burst.

Remember 1989? Unfortunately I do and not just for the leg warmers, shoulder pads and Duran Duran (or was that just me?) but for its boom that led to bust in 1990. The resulting house price deflation as prompted by sky-high interest rates at 15% caused the property sector equivalent of a nuclear winter. It took five years for sustained positive house price growth to return.

But then 2008 was my ‘favourite’ crash in that it was caused by a breed of parasites deemed even lower in the food chain than estate agents – bankers, utter bankers.

Their recklessness resembled drunken monkeys at a roulette table using other people’s money to make bonuses for themselves from financial instruments that no one understood. Especially them.

The vortex though was caused by a ravenous media similarly intoxicated – but for them by the mini-bar of rolling news ratings and the online content clicks that is their very own cheap-flowing supermarket cider. If you keep telling millions of people that house prices are going to crash and back it up with pessimistic ‘experts’ and exaggerated B-Roll of Northern Rock punters queuing round the block for their money, then it should be no surprise that you end up summoning the very embodiment of self-fulfilling prophecies.

But enough of this cheery nostalgic stuff. The UK property market is in fantastic shape right now as we’ve just seen the greatest 12 months in the industry’s history – higher prices therefore bigger fees; and lots more transactions, the latter being the metric that estate agents should really get off on.

This boom (for it is a boom) has been created with magic dust from Downing Street goblins that sprinkled it liberally onto salivating home buyers in July of last year and stood back and waited for the chemical reaction. The goblin malignity got what they wanted as property values ignited at a rate faster than at any time since 2004 and the enthusiastic response from the media again contributed to hyping the market further albeit this time in an upwards direction. The end game of course was not to help buyers, not even happy clappy first timers, but to create a boom-on-paper that would fuel positive sentiment to keep the public positive and, importantly, get them spending money as a means of helping drag the pandemic ridden economy out of its hole. The convenient biproduct also being that homeowners who feel good about their investment are more likely to vote Conservative.

So, a win-win. But what about now that the 30th of June has been and gone and the substantive stamp duty freebie is no more?

The danger in what the Treasury have created is that crash will follow bang as history tends to repeat itself.

But hold on. As I write this in the first few days of July, I should be hearing from my unrivalled network of industry connections that thousands of deals have fallen through, sales have dried up and that pipelines are suddenly depleted. The party, as it were, should be over and the damage should be beginning to be evident as light dawns. Reminiscent of what New Year’s Day 1999 was fated to bring, we should all be staring into the abyss, holding our Porsche keys and shaking our heads.

Yet, Armageddon does not appear to be happening. In fact, June, whilst lighter on listings, seems to have continued in attracting willing buyers and with one large conveyancing business, PCS Legal, telling me that their new case record was smashed last month despite those buyers knowing that their chances of a no stamp duty bonus had evaporated.

And as for fall throughs, it the much-heralded certainty of ‘300,000 sales falling through on 1st July’ turns out to be yet more bunkum and flotsam from ravenous sub-editors and glass-half-empty experts that once again wouldn’t know the UK property market if it tattooed itself on to their faces.

Demand may well come off a little in future months, but it won’t be because the goblins have taken the ball away. The fundamentals of demand and cheap money are too strong to yield to a piddling four grand disadvantage when house prices are on average rising by £32,000 a year. Pay an additional £4000 to make £32,000 in a year? Of course they will.

Add to this some rather frothy economic data no doubt coming soon around GDP, manufacturing, service sector output and employment too and you have a recipe for continued growth.

But, we should worry about property prices overheating and my concern is that if inflation rockets as it is starting to, the Bank of England will respond with higher interest rates to stem it, as that is their brief after all. Such a response would be a grave mistake though and one hopes that government might actually show some sense and suspend the Bank’s inflation targets for a while as we recover economically.

Or, you’ll have to look forward to the 1990’s all over again. And I don’t mean the joys of double denim, Air Jordans and Calvin Klein underpants (pictures are available on my website).

Russell Quirk is co-founder of Proper PR, the property focussed PR agency, and an estate agent for 25 years.

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  1. Chris Watkin

    Interest rates are used to reduce inflation, so if inflation rises, interest rates also rise to bring inflation back under control.

    UK inflation has just gone through the 2% barrier, and I believe by the end of this year or early next, it will touch 4% or 5%. In normal circumstances, this would trigger the Government (or now the Bank of England) to raise interest rates.

    Yet, we had a similar scenario in the late 1980s/ early1990s with a spike in inflation to 8.5% due to a shortage of raw materials and labour, but this was soon sorted out, and inflation dropped quite quickly thereafter.

    In the coming year, a shortage of raw materials might be an issue. If there is a shortage of raw- materials (supply problems are being found in key items such as timber (increasing in price by 112% in a year), concrete, aggregates and steel), this will fuel construction and manufacturing costs upwards.

    Next, will there be a shortage of labour? Some say it won’t be an issue (as unemployment will be higher), yet there are certain sectors of the economy that have an imbalance of trained staff of specialised jobs or people not wanting work in that type of job in the first place.

    For example, many hospitality and dining establishments are reporting a shortage of staff because they were often filled with hard-working European migrants. I have read stories of reports of London restaurants advertising for chefs and waiting staff, who would have received 1000+ enquiries for such jobs pre-pandemic to only be receiving applications that could be counted on two hands this Summer.

    The hospitality and dining sector was hit harder than most, having to stop trading during the three lockdowns and working under firm restrictions. This led to the majority of staff being placed on furlough (as mentioned above, 7 in 10 are still on furlough), which has prompted some to ride out the pandemic in their own Country.

    The question is – will they return? If not to entice them back, restaurants will have to increase the wages they pay to attract the staff, which in turn will mean they will have to put their prices up (i.e. inflation). If businesses’ have to put their wages up and the cost of raw materials continues to rise, prices for everything will rise, and at this point, higher interest rates will kick in.

    But how will increased interest rates affect the UK property market?

    Thankfully, 91% of all new mortgages being written are fixed interest rate mortgages and 78% of all existing UK mortgages are fixed-rate (compared to 32.8% in the credit crunch) .. meaning we won’t have so many houses being dumped on the housing market like we did in the Credit Crunch because on a fixed rate mortgage, if interest rates rise – your mortgages don’t follow suit.

    And that’s the key … unemployment combined with high-interest rates caused many homeowners to put their property onto to the market in 2008/9. Tied in with curtailed demand for property because it was really difficult to get a mortgage (that’s why it was called the credit crunch) .. we had an oversupply and subdued demand of UK homes – causing house prices to drop by 16% to 19% depending on what type of property you owned 

    Meaning 2021 is totally different scenario to 2008/9. Decent article Russell

    1. Hillofwad71

      Excellent summary

      With HSBC  announcing  yesterday that they are cutting prices on around 40 fixed rate mortgaes by up to 0,3 % leading to the lenders lowest ever fixed  rate mortgage of 0.94% they clearly don’t think the B of E will be raising interest  rates  very soon.

      1. AlwaysAnAgent

        The BoE voted unanimously to keep rates at 0.1% back in  June and the next update is on 5th August.

        Most economists are saying that  interest rates will stay at this low level until 2023 / 24. They will, of course, go up at some point, but certainly not for a while yet.

    2. flockfollower102

      It’s different this time. Always interesting to hear, as history  would suggest it normally isn’tt.
      I do not profess to be an expert but one of the known known’s (Donald Rumsfeld anyone!) is that IF interest rates go up even only a very small amount the effect on the property market will be catastrophic.

      When you are on a fixed rate for two or three years of 2% life is easy. However, lets say the BOE put up interest rates by JUST 0.25%. Not very much is it? Except when interest rates are so low, a small rate increase makes a very large difference. That 0.25% actually equates to an increase in the interest paid of 12.5%! That very affordable mortgage can quickly get beyond the income.
      House prices have risen for many reasons, but the main reasons are all the money the government and the banks have pumped in. High loan to earnings ratios and free deposits from the government just two of them.

      I would say the property market is more like a very large stack of straw on the camels back. It will probably take far less than most people think for the poor camels back to break!

    3. Dick Value

      Meaning 2021 is totally different scenario to 2008/9′. Obviously 2021 hasn’t fully played out yet and no-one is yet sure when the post-pandemic era will begin. Economists seek to find patterns by comparing one event with another or one era (say, current) with another era (in the past) in order to substantiate predictions. They really have their work cut out today. In 08/09 we had the global financial crash; today, we have the global pandemic, caused by a biological pathogen, not some bankers in the US arranging ridiculous mortgages. We are in brand new territory here. We have almost a full generation of people hooked on cheap money. This is the main, if not sole, driver behind current house prices. Low supply/high demand is all very well but at what stage do people get priced out of the market? Clearly we haven’t reached that yet but surely it has to be just around the corner?

  2. paulgbar666

    There is a wall of cash looking for a profitable home.


    That created the BTL in 1997.


    Now BTL is out of favour.


    Lending for OO is the only game in town.

    Niche BTL lending still exists for FHL and SA.


    But it won’t be long before Govt abolishes the tax breaks on FHL.

    They will suffer from a S24 type of taxation.

    They will lose small business reliefs.

    There is also the factor of demand.

    Just with EU nationals 6 million have decided to stay.


    6 million houses haven’t been built.


    Then we have all the non-EU migration.


    All this before 3 million Hong Kongers fetch up on our shores as the CCP makes life intolerable for those with a BOP.

    Then we have the effects of the pandemic.

    People want houses with gardens and living space.


    They do not want pokey city centre flats.


    WFH is now a new paradigm.

    It will not be going away anytime soon.


    The property market has changed.


    The reality is that there are insufficient properties of the type and where they are that people want.


    There will be NO property crash of houses.


    Flats could well crash.

    The cladding and construction defects problems have rendered millions of flats as worthless.

    Leaseholders can’t afford the remediation costs.


    Only a fool would bother buying flat currently.


    Houses are where the action is.


    There are far too few of them.

    By end of next year houses will be £100000 more.


    Investing in a house will be the best investment anyone will make in their lifetime.


    Though for letting not such a good idea if EPC C status isn’t readily achievable at reasonable cost.


    Forget flats they are duds.


    There will be no property crash!

  3. htsnom79

    There haven’t been punitive interest rates for a couple of decades, worrying that they might return and result in a crash is the equivalent of worrying that we’ll run out of potatoes.

  4. Louisa Fletcher

    Agree with what’s being said here re. flats vs houses.  Consumer needs and wants have shifted and both the empirical and anecdotal evidence that I’ve seen points clearly to this. Re. the potential for inflationary measures triggering BoE bank rate rises, I’d suggest that the main thing to consider is that it’s not just consumers who would be impacted. The Government borrowing level is eye-watering (forgive me, typed in haste so can’t remember what the £billion figure is!) but crucially, is also linked to BoE base rate.  Rishi Sunak went on record a few months ago to say that the current record low rate has been a key element in enabling him to borrow what he’s needed to fund the Covid-pandemic response and levelling up/infrastructure projects, as the effective borrowing rate of 1.2% makes it serviceable. That being the case, although separate entities, one can’t imagine the BoE rushing to increase rates any time soon, not so much for the consequences it would have on consumer borrowing and confidence – although that would of course be a factor in the decision making process – but more the  Government’s ability to continue to service the record levels of debt accrued. One might also logically assume that Mr Sunak would want to be reporting that a healthy dent has been made in the repayments before the next Election.        

  5. Woodentop

    As I write this in the first few days of July, I should be hearing from my unrivalled network of industry connections that thousands of deals have fallen through, sales have dried up and that pipelines are suddenly depleted.


    So much for your expertise.

    1. paulgbar666

      When furlough ends there will a lot more stock coming to market.


      UC won’t be enough to pay mortgages of redundant employees!!


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