London house prices show ‘bubble-like conditions’, report warns
02-03-2014
By Kate Allen
London’s soaring house prices are pushing the market towards a bubble, an influential group of economists has warned.
The capital’s house prices are beginning to show signs of “bubble-like conditions”, according to a report by the EY Item Club. By contrast, prices in the rest of the UK give no cause for concern.
The average London house price rose by 11.6 per cent year on year, according to figures from the Office for National Statistics. This compares to 3.1 per cent in the rest of the country outside London and southeast England.
In response, the government should cap the amount housebuyers can borrow against any particular level of deposit, the Club said. This limit on income multiples would be more effective than cancelling the government’s flagship Help To Buy policy, which subsidises borrowing for house purchases. “The most likely source of a bubble is London, where the impact of Help to Buy is likely to be small,” the report noted.
Andrew Goodwin, the Club’s senior economic adviser, said the focus on Help To Buy was a “red herring”. He added: “The scheme has only a very limited impact on the capital and withdrawing it could risk choking off the recovery in housing transactions across the rest of the UK, without solving any of London’s issues.”
The Club also urged the government to borrow more in order to pay for a programme of public sector housebuilding. Mr Goodwin said: “Large public sector building programmes have been pursued in the past, but in recent years local authorities have built only a couple of thousand properties a year.”
The government could also relax planning rules in and around London and sell its brownfield land holdings off to housebuilders more quickly, the report said.
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