House prices in London and the South East: ‘bubble’ or sustainable growth?

Average house prices at all time high
The Nationwide Building Society’s latest house price index data shows that the UK average house price has hit an all-time high at £186,500, with annual house price inflation now running at 11.1%, its highest level since June 2007. Consumers have become a lot more confident about buying property, reassured in part by Government schemes to boost lending such as Help to Buy and the Funding for Lending Scheme (although the latter has now been refocused on lending to small businesses).

Time to ‘cool’ the market?
Inevitably, there have been calls in the media for the Government to ‘cool’ the housing market before the London and South East ‘bubble’ bursts. However, such reactions are a little extreme in our view. The monthly rate of house price inflation reported by the Nationwide in May was 0.7%, lower than the 1.2% in April. Its three-month growth figure, less volatile than monthly comparisons, also fell, from 2.5% in April to 2.3% in May, the lowest level since last August.

Effects of MMR
In addition, experts within the industry are suggesting that the introduction of the Mortgage Market Review in April, with tougher rules on affordability, have already led to a slowdown in the market. This is probably a temporary reduction in activity, but it is likely to cool the market down over the summer.

Supply and demand
Meanwhile the Land Registry has published its data for 2013. The number of housing transactions saw a sharp rise, up by 19% to 747,479, the highest since 2007. But transactions in that peak year were over 1.2 million per year. The main problem is the difference between supply and demand. During January 2014, the number of properties coming onto the market was at its lowest point since July 2012, although the number of potential buyers continues to increase everywhere.

London and the South East have the biggest issue with the imbalance between supply and demand, the latter to some extent because of the former.

According to property firm, Hamptons International, in some parts of London, annual price rises have exceeded 20%, and, although activity is picking up in other parts of the South East, Hamptons said the gap between property values inside and outside the M25 is at its highest level ever, at more than £200,000.

London property market is not fuelled by debt
Much of the property inflation in London is not being driven by lending at all. Foreign investors still see London’s prime property market as a safe haven for their capital and many of the largest transactions are cash sales. Criticism of the Government’s Help to Buy Equity Loan scheme are therefore wide of the mark. According to the Halifax, the average property value for its Help to Buy scheme applications is £157,660. That doesn’t look much like a debt-fuelled house price bubble, despite the scheme being available on house purchases up to £600,000. The average amount lent to borrowers in greater London was only £280,000 (against an average price of £593,000 according to Rightmove) and only 20% of the borrowers Halifax lent to on the scheme were in London and the South East.

London’s ripple effect
Talk of a house price bubble in London is understandable given how fast property values are rising. But London is a major global city, with a safe political system and a relatively low tax environment (particularly compared to Paris). And if prices in London keep rising, then people who work – and would like to live – in London are being pushed further from the centre of the city and paying more for their homes. That in turn is pushing those who lived there further out still into the whole of the South East of England.

Not a bubble, more a permanent imbalance between supply and demand
With property in and around the capital so scarce, unless the government starts building thousands of houses in London and the South East right now, the law of supply and demand means that prices will keep rising.

What should you do?
Why not contact Marchwood IFA for a chat about your options? Unlike individual high street banks and building societies, we can advise you on the right mortgage for you from the whole of the market. Finding the right mortgage product is one thing but getting a mortgage offer is altogether different. And this is where we really add value. Our sole objective is to get you what you want in the most painless way possible. When dealing with the banks this is not always straightforward, particularly at the moment as the effects of the Mortgage Market Review continue to be felt. We collect everything required from you and liaise on your behalf with the lender until the mortgage offer is produced and you can move into your new home. Whether you are buying a new home or an investment property or wish to refinance an existing mortgage, we have the skills, tools and experience to help.

Your property may be repossessed if you do not keep up repayments on your mortgage.