House Prices Rocket Whilst Inflation Drops

The results of this weeks’ House Price Index from the Office for National Statistics, (ONS) makes for some remarkable and thought-provoking reading.

The highlights from the report :-

• UK house prices increased by 9.1% in the year to February 2014, up from 6.8% in the year to January 2014.
• Annual house price increases in England were driven by rises in London (17.7%), the South East (8.0%) and the East of England (7.7%).
• Excluding London and the South East, UK house prices increased by 5.8% in the 12 months to February 2014.
• On a seasonally adjusted basis, average house prices increased by 1.9% between January and February 2014.
• In February 2014, prices paid by first-time buyers were 10.5% higher on average than in February 2013. For owner-occupiers (existing owners), prices increased by 8.6% for the same period.

London’s crazy property market continues to act like a runaway express train, with the average price in the capital now a whopping £458,000 after the fastest annual growth since 2007.

With inflation overall falling to 1.6%, this makes London’s 17.7% uplift look even more extraordinary, contributing to a growing issue which continues to widen the gap between the generations in terms of home ownership.

With mortgage lending tightening due to the Mortgage Market Review this will be a further blow to First Time Buyers hoping to get onto the property market who have to pay on average 10.5% more for their property than they did last year.

The big question is how long can this go on for and although there is limited evidence that schemes like Help To Buy 2 have had much effect in London, too many schemes that boost demand, rather than supply, does have the potential to blow up a housing bubble. As a start the cap of £600,000 on Help To Buy 2 should be cut to £300,000, keeping the focus on where help is most needed.

The blame for this boom has been put on various factors, too many foreign investors, cash buyers, BTL investors, low interest rates and recently “easy” mortgages and high income multiples. Although these ONS figures are mortgage related, with the Mortgage Market Review about to take effect the latter may still be misplaced as obtaining a high income multiple mortgage is still tricky and about to get more difficult.

No doubt MMR will help to address this issue, as will a no doubt more conservative spate of lender valuations, but all of this ignores the simple fact that there is not enough supply and the high stamp duty rates are putting off potential vendors from selling and purchasing somewhere else.

London has always had a unique property market, with demand for housing from cash rich UK and overseas buyers unwavering. As London continues to prosper this demand is unlikely to abate any time soon.

So regardless of government schemes, the simple fact is that increasing housing supply, that is ultimately affordable, is the crucial factor. Providing £800,000 studio flats does not help anyone and the problem is that in recent years, governments of all sides seem to have struggled to provide sufficient plans to do this.

The question as to whether the runaway train will slowly decrease its speed and come to a gentle stop or ultimately come off the rails remains to seen.

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