"Bubble or boom? Why ultra-low interest rates mean house prices may never bust". That's The Guardian's headline. Its a long read, so here's a more digestible version....
The article's next line reads "In this era of cheap money, what once might have looked like a housing bubble might just be the new normal"
It's not just the UK, where a supply/demand imbalance has been driving property values persistently upward for many years. Ever increasing prices are being seen in many developed economies such as the US, Australia and New Zealand, driven by low interest rates.
The economic crash of 2008/9 followed by the current pandemic has seen interest rates slashed to record lows. The US's Federal Reserve is the heavyweight when it comes to monetary policy and has indicated that low rates are likely to be around for a long time.
A defining characteristic of a bubble is when prices are not justified by economic fundamentals. However, this time round, it is the fundamentals themselves which have changed.
The expectation is that central banks will do whatever is necessary to maintain economic growth. With the UK's base rate currently at 0.1%, they could still go lower. The Bank of England last year looked at financial institutions' ability to cope with a change to negative rates, later stating that it is a tool that remains in the locker.
Negative rates are not unknown. The base rate in the Eurozone is -1%. You can get a mortgage in Germany at an interest rate of just 0.3%. Japan has been operating ultra-low rates for 30 years. Economists are not currently forecasting further rate cuts, but the potential is there.
Even without further cuts, today's interest rates will continue to feed through to the property market for years to come.
The UK has seen property prices rise steadily for the past few decades, driven in large part by a shortfall in construction of new homes dating back to the 1980s. Successive governments have made efforts to increase supply, but current construction is still falling far short of demand. In addition, the demand side is also being driven upwards by low interest rates and are now seeing a further boost from the 95% mortgage guarantee scheme.
The areas likely to see the greatest increases in property prices are those where affordability - the relationship between house prices and average incomes - is highest. Major property services giants such as Savills and JLL suggest that these are Northern England and the Midlands.