Call for action over London housing 'bubble'

Stronger action is needed to guard against "bubble-like conditions" in London's housing market, expects have warned, with the average house price set to hit £600,000 by 2018 according to a new estimate.

Steep price rises in the capital would see the London average reach 3.5 times the average price in Northern Ireland and more than 3.3 times the average in the North East, according to a report from economic forecasting group EY ITEM Club.

While the rest of the UK is returning to normality, London's housing market is showing signs of "bubble-like conditions" and policy makers should be prepared to step in, the report said.

It said the Bank of England's Financial Policy Committee (FPC), which oversees stability, may need to consider imposing a formal limit on income multiples in relation to the size of the mortgage that someone wants to borrow.

The report came as a separate paper from think tank Civitas suggested that restrictions should be placed on overseas investment in London homes to help ease "rampant house price inflation" and the problem of younger people and families being "priced out" of the market.

Some analysts have criticised the Government's flagship Help to Buy scheme, which gives people with only low deposits saved a helping hand, for pushing up demand in the housing market at a faster pace than the supply of properties for sale. They say this imbalance between demand and supply is fuelling an upward pressure on prices.

But Andrew Goodwin, senior economic advisor to the EY ITEM Club, said that calls to scrap or alter Help to Buy were a "red herring" and doing this could choke off the housing market recovery in the rest of the UK without tackling London's particular issues.

He said: "House prices across most of the country remain well below their pre-crisis peaks and there seems little danger of a bubble developing. But London, which is suffering from a combination of strong demand and a lack of supply, is increasingly giving us cause for concern."

Recent Land Registry figures showed that house prices in London increased at more than double the rate of the rest of the UK over last year. London house prices leapt by 11.2% over 2013 to reach £403,792 on average, while prices across England and Wales generally lifted by 4.4% in the 12 months to December to reach £167,353.

London has continued to be a strong pull for wealthy investors looking for a "safe haven" to place their cash.

The EY ITEM Club report pointed to research showing that prices in prime central London now sit at 27% above their 2007 peak, with this market "being affected mainly by the level of interest from foreign investors".

The Civitas paper argued that non-UK residents should only be allowed to buy a property here if their investment will also boost the number of homes.