London shows signs of house price 'bubble’, experts warn
02-04-2014
London shows signs of house price 'bubble’, experts warn
Income multiples at pre-crisis levels in the capital and rising, warns EY Item Club
Pinner in suburban London
The average house price in London will rise to £600,000 by 2018, says the EY Item Club Photo: GEOFF PUGH
By Scott Campbell
The Bank of England must be “prepared to take action” on housing market controls amid fears that London is beginning to show “bubble-like conditions”, according to new research.
The average house price in the capital will rise to £600,000 by 2018, experts predict in a report released on Monday by economic forecasters the EY Item Club.
The cost is 3.5 times more than the average house price in Northern Ireland and over 3.3 times the average in the North East.
The research also revealed that income multiples are now back to pre-crisis levels in London as homeowners take on increasingly expensive mortgages.
During the past year, house prices in London have increased at more than double the rate of the rest of the UK to an average of £403,792, according to recent Land Registry figures.
The Item Club said that it favours intervention over the introduction of higher interest rates, so the Bank of England’s Financial Policy Committee (FPC) would need to be involved in any preventative action.
“We think that caution on the part of mortgage borrowers and lenders will prevent this from moving above a factor of three, just as it did in the last expansion,” the report said.
“However, were income multiples to rise further in London, or if other regions were to increase and pull the national average up towards three, it would warrant the FPC intervening to push multiples back down.”
Despite analysts’ concerns about the capital, the housing market in the rest of the UK is returning to normality.
Outside of London, the regions with the highest house price increases are set to be the South West and East, with estimated growth of 6.2pc in the next four years. The North East is predicted to have the lowest price growth level at 4.2pc, while Scotland will be marginally ahead with a predicted rise of 4.5pc.
Housing transactions are predicted to rise by 5pc each year, with 1.36m people expected to move house in 2018. While the predicted figure is short of pre-crisis peaks, according to the Item Club’s report, an annual rise is a clear indication that the housing market is functioning normally again.
Andrew Goodwin, senior economic advisor to the Item Club, said: “House prices across most of the country remain well below their pre-crisis peaks and there seems little danger of a bubble developing.
“But London, which is suffering from a combination of strong demand and a lack of supply, is increasingly giving us cause for concern.”
Some analysts have criticised the Government’s Help to Buy scheme, arguing that it creates an intense demand from first-time buyers who supply no new properties to the market. They say that this imbalance is adding to the increase in house prices and that the Government should be concentrating on increasing supply, rather than encouraging people to stretch their borrowing.
A separate report by property analyst Hometrack warned that upward pressure on house prices is set to “build rapidly” this year as the homes market supply and demand gap is at its widest in four years.
Richard Donnell, director of research at Hometrack, said that supply will improve only if existing property owners put their homes on the market.
“If sellers remain slow or reluctant to enter the market, in expectation of further price gains, then the upward pressure on prices will build rapidly once again,” he said.
However, Mr Goodwin said calls to stop running Help to Buy are a “red herring” as the scheme has very little effect in London.
He said: “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 FPC should instead be looking to limit income multiples.”