What is true of physicists however is not true of some property economists who seem to be clinging to a few explanatory variables rather than acknowledging that other, previously undiscovered, forces may be at work in the UK housing market.
Predictions of another housing market crash are still being made by some on the basis that the average house prices to average incomes ratio is still high in relation to historic levels. But it is impossible to explain recent housing market behaviour and price growth since 2009 if all that matters in the housing market is household incomes and mortgage rates.
We have been observing the prime markets for over 30 years and, in so doing, have noticed the very low reliance their behaviour has on mortgage rates, lending policies or the world of debt in general. Rather, it is new wealth, bonuses, savings and investment, domestic and overseas, that drives these markets. In short, equity, not borrowing, is key.
We have long suspected the equity used in prime markets has not just leaked but sometimes cascaded into surrounding markets and down into the mainstream markets. Anecdotal evidence has pointed to such a "champagne tower effect" but it is difficult to measure and so has been ignored by the macroeconomic scientists – despite being an increasingly obvious component of UK housing market behaviour.
The Eureka moment has been in measuring, as well as observing, housing equity. First its existence was quantified in the UK housing market as £2.9trillion of owner occupied stock, then it was observed and measured flowing from overseas into the prime London market at the rate of £3.7billion in a single year.
In measuring equity, it became apparent there is a divide between those that have it and those who do not. This is a Generational Divide: equity is concentrated among the older age groups; it is a Geographical Divide: equity is concentrated in London and the South; and it is a Tiered Divide: equity is concentrated at the prime end of the market.
With less debt finance available, it is as if the glasses at the edge of the tower have been emptied and are waiting for equity to make up the deficit. The champagne tower of the housing market may be filling at the top and in the centre (London) but it has most definitely not reached the equity-starved edges.
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