London Fuels Record Growth in UK House Prices

English property prices pushed roaring demand for London housing more than their peak at the height of the country's economic boom according to this article by Ed Hammond, Kate Allen and Claire Jones of FT Adviser on September 17th, 2013.

Roaring demand for London housing has pushed English property prices beyond their peak at the height of the country’s economic boom, official figures showed on Tuesday, underscoring concerns of an impending housing bubble. 

House prices in the capital outpaced those in the rest of the country by a factor of 10 times during the past year, according to figures from the Office for National Statistics. The jump helped lift the English average house price 3.7 per cent during the 12 months to July to £255,000, surpassing the 2008 zenith.

 

The Bank of England’s Financial Policy Committee, which is responsible for safeguarding financial stability, is on Wednesday expected to discuss the housing market against the backdrop of warnings from policy makers that the government’s mortgage guarantee schemes are fuelling nationwide price growt.

Last week, the Royal Institution of Chartered Surveyors urged the BoE to curb the risk of another housing boom by taking the unprecedented measure of capping national house price growth to 5 per cent a year.

After stripping out the impact of London, however, average UK house prices rose just 0.8 per cent during the year, underlining the diverging economic fortunes between the capital and the wider UK housing market.

This divergence complicates the BoE’s new policy of “forward guidance” under which the FPC must confirm that ultra-low interest rates are not serving to undermine financial stability.

While it would be unlikely for the FPC to signal the end of forward guidance a little over a month after its introduction, the new policy heaps pressure on the FPC to explain why housing is not compromising financial stability.

To date policy makers have focused on a one-size fits all solution for the country.

“The difficulty is you have significant variations between London and the rest of the UK, so it is impossible to control pricing by manipulating the entire mortgage market,” said Lucian Cook, head of UK residential research at Savills, the property group. “All it will achieve is to create further polarisation between the equity-rich buyers and the debt-reliant market”.

The cost of an average London home hit £318,000 in the 12 months to July, according to the Nationwide, compared with £167,200 for the rest of the UK. The difference means the average London house is worth 1.9 times property elsewhere, eclipsing the 1987 peak of 1.75 times.

Analysts do not expect the FPC to announce measures to restrict activity in the mortgage market in its post-meeting statement next Wednesday. Mark Carney, governor of the BoE, last week played down concerns a housing bubble is inflating, while saying policy makers needed to remain “vigilant”.

“When looked at in the broadest terms, it is obvious that no agent of the government would wish to act at the current time to cool the housing recovery,” said Brian Hillard, economist at Société Générale. “What the Bank can do, however, is monitor the state of the housing recovery.”

Prices also rose in Northern Ireland, where the property market has been devastated in recent years. Average house prices fell in both Scotland and Wales, however.

The ONS index only includes transactions involving a mortgage – it does not include cash-only purchases. A substantial proportion of sales are now to cash buyers.

The LSL/Acadametrics index, which includes sales to cash buyers, showed a 3.2 per cent annual rate of growth in its most recent figures. But other indices run by mortgage lenders, such as Nationwide and Halifax, show prices are still substantially below their 2008 peak. House price indices have diverged in recent years, as methodological differences produce increasingly divergent results.

Article Source: http://www.ft.com/intl/cms/s/0/0d15ebae-1f8f-11e3-8861-00144feab7de.html#axzz2fPX03wcg