Here’s why Mark Carney might prick London’s property bubble this year
01-14-2014
Here’s why Mark Carney might prick London’s property bubble this year
By: Matthew Partridge
Houses for sale © Getty Images
London’s property market is out of control
The London property market is getting out of control.
Just over a week ago, I went to two ‘open houses’ in southeast London. The first flat, in Charlton, had originally been put on the market in November at £325,000. Just two months later the asking price was up at £370,000 – a 13% jump.
The second flat was a privately-owned two-bedroom flat in a local authority building. Granted it was in Blackheath village, which is never cheap, but it was pretty basic. That was also on at £370,000 – up £100,000 (37%) on six months ago.
Both properties had plenty of potential buyers lining up to view, including some from outside London.
The consensus view is that the UK property market will keep strengthening, certainly this side of an election.
But I’m not so sure that London can wait that long for a pin to prick this bubble…
Mark Carney’s uncomfortable dilemma
I’m hardly alone in thinking that London property prices are getting out of hand. Legal & General chief executive Nigel Wilson tells The Daily Telegraph that prices are now “absurd”. The government’s ‘Help to Buy’ scheme is “stoking demand” and should be scrapped.
Given that the housing market is at least partly responsible for the UK’s sharp economic rebound in the past year, George Osborne won’t be keen to do anything to risk it. But Bank of England boss Mark Carney may yet surprise us all.
Carney must be feeling a bit uncomfortable. When he agreed to take over as bank governor, Britain was still facing headlines about a ‘triple-dip recession’. Now everyone’s talking about a boom. Unemployment is plunging. When Carney said that he’d think about raising interest rates if unemployment hit 7%, he thought he’d effectively parked the issue for two years. But we’re now at 7.1%, and quite possibly only months or even weeks from his target.
We’re not saying that Carney will raise rates imminently. He’ll make an excuse to adjust the horizon. But he’s running out of excuses to argue that the economy needs the added stimulus of a government-backed mortgage scheme.
Carney has hardly embraced surging house prices with open arms in any case. In December, he warned that there was the “potential” for another crash. While it’s easy to dismiss such words as rhetoric, he has made some changes – such as preventing the Funding for Lending scheme from being used to fund mortgages.
Of course, even if he’d like to, Carney can’t scrap Help to Buy. Having house prices crash months before an election would be political suicide for the government. But that doesn’t mean the scheme will survive in its current form.
The Bank of England is due to re-examine it in September to see whether it is working properly. This would provide the perfect opportunity to impose restrictions that would reduce its scope, but not cause the disruption that an outright end would produce. If there’s ever been a good opportunity to test whether a central bank really can stop a house price bubble without crashing the rest of the economy, then this is it.
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Can Carney surgically pop the London bubble? It’s a good time to try
One option would be to ban London homes from the scheme. Obviously, he can’t do this explicitly. But reducing the maximum value of properties eligible would do the same thing.
Today you can get access to Help to Buy for any property valued at up to £600,000. At the moment, that covers the average house price in 27 of 33 London boroughs (according to Nationwide data).
But say you pull the maximum down to £400,000. You could still buy the average house in Brighton (the next-most expensive town), but you rule out about half of London.
And a cut to £300,000 would leave just six London boroughs eligible, but still be higher than the average price in just about every other part of the UK. Better yet (from Carney and Osborne’s point of view) this might not be bad politics.
As our editor-in-chief Merryn Somerset-Webb has pointed out, many people think house prices generally are too high. In fact, a November Ipsos-Mori poll MoneyWeek sponsored suggests that more people want them to fall than rise (39% versus 29%).
But in London this feeling is particularly strong. Only 27% want further rises, against 46% who want falls.
House prices in London are extremely overvalued
If Carney does decide to tighten up Help to Buy, then the London market could be extremely exposed. Nationwide data suggest that prices in London are now 7.5 times the income of the average first time buyer. That’s the highest ratio since records began at the start of 1983.
It’s also 56% higher than the average during that period, which was only 4.8 times. While prices have also outstripped average incomes for the rest of the UK, the difference is only 34% (4.6 times, against a historical average of 3.4 times). In short, London is particularly over-priced right now.
Of course, the city is still seen as a global safe haven, which may prove important if the euro crisis (or revolution in the Middle East) flares up again. However, research by Christian Badarinza of Oxford University last year suggests that people investing in this way tend to cluster – they buy mainly in areas where fellow nationals have invested. So unless you live in an area with a large number of wealthy Greek or Italian exiles, this is unlikely to be a major factor.
In any case, whether the final outcome is a breakup or a painful recovery, the euro crisis will eventually be resolved. And when this happens, the ‘panic money’ is likely to go back where it came from, hitting prices.
Prices in the rest of the UK, which still haven’t fully recovered from the crash, may have a way to run. However, London prices are clearly in bubble territory. And if they continue to rise at this pace, it just means the crash will be harder when it does take place.
If you really want to invest in London property, you might be better looking at the commercial property side instead – here’s one company I wrote about in November.