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London's housing market showing 'bubble-like conditions'

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London's housing market showing 'bubble-like conditions'

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Published by Jon Land for 24dash.com in Housing and also in Central Government

London's housing market showing 'bubble-like conditions' London's housing market showing 'bubble-like conditions'

London’s housing market is beginning to show signs of "bubble-like conditions", according to a report published today.

Caution on the part of borrowers and lenders should prevent a serious problem developing, but policy makers should be monitoring this trend closely and be prepared to take action, Ernst and Young's ITEM Club report said.

Research shows that income multiples are now back to pre-financial crisis levels in London, with homeowners taking on ever larger mortgages.

Andrew Goodwin, senior economic advisor to the EY 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 have suggested that help to buy should be altered or cancelled but this is a red herring. 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 FPC should instead be looking to limit income multiples.”

The EY ITEM Club forecast shows average UK house prices growing by 8.4% this year and 7.3% in 2015, before cooling to around 5.5% a year thereafter, as help to buy (HTB) comes to an end and interest rates steadily increase.

By 2018, the average house price in London is expected to reach nearly £600,000 – some 3.5 times the average price in Northern Ireland and more than 3.3 times the average in the North East.

Outside of London and the South East, the regions with the highest levels of house price growth are expected to be the South West and East of England, both set to grow by 6.2% from 2013-18. In contrast, the North East is expected to have the lowest level of price growth (4.2%), with Scotland (4.5%) and the West Midlands (4.6%) not far ahead.

Dean Hodcroft, head of EY’s real estate, hospitality and construction team, added: “A targeted ‘London only’ approach to market cooling measures could be effective. Bursting a bubble at the luxury end of the market, which continues to attract interest from international cash buyers with the seemingly irresistible global draw of London’s X-factor, may prove tricky.”

Andrew Goodwin added: "The government should be doing more to resolve rigidities in the planning system, with a particular focus on ways to increase supply in and around the London area. The government still owns a sizeable amount of brownfield land which could be sold off to house builders more quickly than it is currently.

"On a larger scale there is also a case for the government to use its own low borrowing costs to fund a programme of house building. 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.”

Commeting on the report, London Assembly Green Party member Darren Johnson, said: "Building expensive homes for the super-rich is just helping to drive up house prices and rents for everyone else. The mayor has to start building homes for Londoners instead of homes for investors.

“We need property and land taxes to dampen demand from the super-rich, a much higher level of investment in affordable housing, and regulations to protect those left renting privately from investor landlords.”

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