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London Property Bubble Set to Deflate

London Property Bubble Set to Deflate

London house prices have rocketed in the past year, and the average house price in the city now sits at around £460,000. This is bad news for the rest of Britain, and the EU commision last week attempted to intervene, telling cabinet ministers that there needs to be a policy rethink in the housing market.

The fevered market is partially driven by a shortage of homes, however, more important is the demand stoked by schemes like Help-to-Buy, low interest rates and above all, a readily available supply of credit.

However, in what is good news for buyers, but slightly less positive for sellers, it seems that the property market is heading for a long overdue correction.

The London bubble’s air supply is being cut off

After Brussels’ timely intervention, it appears as though leaders are turning off the easy-credit taps that have been causing the price inflation. Two months ago, housing market regulator, the Financial Conduct Authority (FCA) introduced new rules under the mortgage market review, designed to put a stop to what it sees as banks’ reckless lending habits.

The rules were left deliberately vague so that banks couldn’t get away with ticking a few easily completed boxes. Instead, banks now have to consider a wide range of criteria, including the potential future impact of rate rises and the apparent stability of an applicant’s disposable income.

It’s easy to be cynical on this topic. Instead of tightening mortgage lending criteria, it may have been easier to to just drop the large subsidies, available as part of the Help to Buy scheme, which have caused a fall in the cost of loans.

The new rules do however appear to be having an impact upon the availability of loans. According to the Bank of England, the value of mortgage lending for new purchases is at it’s lowest level since last August, and is 20 per cent lower than it’s January 2014 peak.

Conditions are set to become even tighter, with Lloyds and Nationwide recently beginning to phase out tracker mortgages, and are instead pushing people in-to fixed-rate loans.

It’s clear that the major banks are worried that people could begin to take up cheap mortgages, only to be unable to repay when rates rise.

The Correction is Coming

The Government and the Bank of England are under significant pressure to do even more in an attempt to burst the bubble. The International Monetary Fund (IMF) has also decide to chip in and convince the authorities that drastic action needs to be taken.

The IMF has warned that the housing bubbles is one of the biggest risks the UK economy has seen in years. It has urged the government to adopt formal limits on lending and to consider scrapping the second part of the Help to Buy scheme, which guarantees no mortgages.

The scheme is seen as too politically important to be scrapped, especially by chancellor George Osborne, the man behind the plan. Both the government and the Bank of England seem reluctant to act, both of them insisting that the responsibility is not theirs and lies with the other. It’s clear that neither wants to be seen as the reason for a large drop in prices, just before a general election.

It seems however, like the Bank of England will take some action before the end of 2014. The Financial policy Committee starts a review of the mortgage market and Help to Buy in the next couple of weeks.

It is clear that London’s property market is long due some correctional altering. This could come sooner, and harder than many people have estimated, as to return to historical price:earning ratios, prices need to be cut by over 30 per cent.

Author Bio: Bradley Shore is an avid property and investment writer, he writes for a number of clients such as Innovo Property. He likes to knowledge his readers on the latest of the property and investment market, and thrives on making this happen.

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