The risks of a house price bubble in London will be held in check by the market constraints of mortgage regulation, stamp duty rises and the damping effect of future interest rate rises, say property agents.
Fears of a property price bubble in the UK capital were raised last week in research by UBS, after the bank placed it at the top of a ranking of international cities in its 2015 “real estate bubble index”, ahead of Hong Kong and Sydney.
“London is by far the most overvalued market in Europe, at risk of a bubble as a result of explosive price behaviour since 2013,” UBS said.
Worries about over-exuberance were further stoked when academics from Lancaster University released research arguing that London was on track to be in a house price bubble by 2017.
The UK Housing Market Observatory at the university, set up to look for signs of pricing bubbles in the UK regions, found no such danger. But it said that if real house prices in London continued growing at their current quarterly rate of 2.75 per cent the city would enter the bubble phase within two years, producing a ripple effect in outer London and across the UK.
In its latest quarterly inflation report on Thursday, the Bank of England cited evidence that demand was outstripping supply as homeowners were wary of marketing their homes while there were fewer properties available to buy.
“That imbalance between new instructions to sell and new buyer demand may also be putting upward pressure on prices: although average annual inflation in the Halifax and Nationwide house price indices has fallen slightly from its recent peak of around 10 per cent last summer, it remained robust at around 6 per cent in September,” the Bank said.
Estate agents, however, said the risks of a bubble would be countered by other factors such as changes to stamp duty land tax, the effects of which had been felt particularly at the top end of the London market.
Tom Bill, head of London residential research at Knight Frank, said: “The bubble analogy suggests a rapid implosion, which is not the way we see it. The air has been slowly coming out of the [prime London] market for more than a year. Since the end of last summer as the election moved on to the radar we started to see annual growth decline and that was accentuated after the reforms to stamp duty.”
Knight Frank has pruned its 2016 price growth forecast for prime central London from 4.5 per cent to 2 per cent.
Savills, meanwhile, is forecasting a 15.3 per cent rise in London prices over the next five years, trailing the 17 per cent rise it predicts for the UK as a whole and a 21.6 per cent jump for the south-east.
Lucian Cook, head of residential research at Savills, said affordability in the mainstream London market had been constrained by the tighter lending rules introduced last year under the mortgage market review and other regulation dictating how much banks could lend borrowers as a proportion of their income.
“You’ve still got some capacity for price growth in London over five years because you’re going to have an incredibly affluent buyer profile and people will shift in terms of where they look. But you will find affordability eroded and, as a result, pressure on transaction levels and continued growth of private renting as people struggle to access home ownership.”
Higher forecasts are being offered by CBRE, the property adviser, which thinks London house prices will grow by 9 per cent in 2015, and by 31 per cent in the four years to 2019. It cited the stimulating effects of housing legislation going through Parliament intended to boost construction of homes for first-time buyers.
Jennet Siebrits, head of residential research at CBRE, said: “Developers will soon be able to deliver schemes that are 100 per cent for private sale, supplying affordable starter homes rather than incorporating an affordable rental element.
“This will be a boon to housebuilders and should act as an incentive, bringing developments forward and thus more homes to market.”
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