Bubble or not? House prices rise much faster than rents but property is tipped to jump another 10% in two years
03-31-2014
- London house prices rise five times faster than rents
- Across the country property has risen three times as fast as rents
- Forecaster say house prices may rise 5% this year and another 5% in 2015
By Alex Hawkes, Financial Mail On Sunday
House prices in London have risen five times faster than rents in the capital since 2005 – adding fuel to suggestions that price rises are being driven by a speculative bubble.
The London boom is extreme but a similar picture is emerging right across Britain, where the price of housing has risen at three times the rate of rents.
Forecasters across the board are predicting huge surges in house prices over the next two years, which is bound to accentuate the imbalance.
Speculative bubble: The London boom is extreme but a similar picture is emerging right across Britain
The research by The Mail on Sunday is based on figures from the Office for National Statistics. It is likely to lead to further questions about whether regulators and politicians should intervene in the property market.
It comes after warnings in the last week from the Bank of England and the former financial regulator Lord Turner.
The ratio of prices to rents is important because the rental return on a property is a key long-run indicator of its fundamental value.
Also, if property prices are rising mainly because of the number of people looking for somewhere to live, the same effect should be seen in rents which would also be expected to go up if more people were on the hunt for living accommodation.
‘I think signs that prices are rising far more rapidly than rents is a cause for concern,’ said Ed Stansfield, a property economist at consultancy Capital Economics.
‘It tends to suggest that all the concern about a chronic housing shortage is overdone.’
Despite believing that gains in property prices may not be based on fundamental value, Capital Economics is not predicting a price fall.
It expects house prices across the country to rise by 5 per cent in 2014 and by the same amount next year. This would see prices up by 10.5 per cent by the end of 2015.
House prices in London rose by 62 per cent between January 2005 and December 2013.
Rents rose 12 per cent over the same period, according to the Office for National Statistics. Across England, prices increased by 26 per cent over that period, against a 9 per cent rise in rents.
In Britain as a whole, rents rose by 3.7 per cent between January 2011 and December 2013. House prices in the UK, the closest comparable area, rose 8 per cent over that period.
Oliver Atkinson, director of the online estate agent Urban Sales & Lettings, said last week that prices in London were ‘bordering on the doolally’.
Neal Hudson, a housing analyst at estate agency Savills, said the ONS data may not present the full picture and that private sector figures showed stronger rental growth.
He said: ‘The much lower growth in the ONS index suggests that landlords are generally more keen to minimise voids rather than maximise rents, but when they are faced with finding a new tenant they are able to push up rents due to strong demand, particularly in London.’
Soaring: Official figures show the price of the average UK home hit £254,000 in January - a rise of 6.8 per cent in a year