James Ashton: Only new homes can prick the property bubble

As London’s housing market overheats, Lloyds is limiting mortgage lending. That won’t solve the problem

Limited powers: for now, Mark Carney has sworn off raising interest rates, which are at a historic low (Picture: AFP/Getty)

AFP/Getty

James Ashton

22 May 2014

The slip of paper pushed through our door was from a “professional couple currently living in Fulham who are looking to buy a family home in Wimbledon”. They had made an offer on a house down the road, but “in the event that you are considering selling your property, and want to avoid estate agency fees, please do get in touch”.

It’s not the first sign of heat in the housing market round our way. Properties selling before the For Sale signs go up, whistle-stop viewings, sealed bids, friends cashing in and heading to the wilds of Epsom: suddenly a bog-standard terrace is changing hands for numbers you never dreamed of. The price crash of 2007 and 2008 is a distant memory for London homeowners, smug until they realise their own cost of trading up. But how hot is too hot?

That Lloyds Banking Group is limiting mortgage lending to four times income for loans worth more than £500,000 suggests something must give in the capital. True enough, Savills points to a correction on the way — but nothing so dramatic as a decline. The estate agency predicts that after London prices grew 40 per cent in the past five years, they might only add another 24 per cent in the next five as the rest of the UK at least matches pace following nine years of trailing.

We are told there is nothing to fear about boom turning to bust. George Osborne reminded the annual CBI dinner last night that the Governor of the Bank of England has the powers to “spot emerging risks” in the housing market so that we “stop repeating” errors of the past.

Yet Mark Carney, the most powerful inhabitant of the Bank of England in living memory, has been at pains to point out over the past week that he can do plenty — such as order lenders to hold more money against high-risk loans — but he can’t build the new homes required to sate demand.

Both the Chancellor and Governor are for now sworn off lifting interest rates, the natural brake on the housing market, even though rates remain at five-year historic lows. The reluctance to kick away the crutch of Help to Buy highlights that this economic recovery is nailed to the rising property market until such time that business investment and exports join the party. But Help to Buy is a red herring in London, where it has been used for a fraction of purchases.

The London market has always behaved differently. House prices almost everywhere outside the capital are still below their 2007 peak; in the capital they are 30 per cent higher. The Halifax index is showing eight per cent appreciation in London this year after 7.5% in 2013; in parts of Wales and the north-east of England prices are going backwards again.

London’s average growth rate masks bumper price increases of up to 40 per cent a year among super-prime properties in boroughs such as Kensington and Chelsea. Here, cash purchases are impervious to borrowing costs or incremental taxes. Carney is powerless to tame London’s luxury appeal.

What Lloyds is particularly worried about is if the market in Zones 2 and 3 bubble up in an attempt to keep pace with the centre. Knight Frank points to growth in “prime outer” London driven by the sub £2 million price bracket, where prices rose 13.1 per cent last year, while homes worth more than £5 million grew by only 4.3 per cent. For stretched families the bidding wars are over homes with room to swing a cat and in the catchment of decent schools.

Where are the brakes? With little or no wage inflation, affordability should be one of them. A Liberal Democrat-devised mansion tax for homes worth more than £2 million is a punitive tax on London and fails to distinguish between wealth and income. But its introduction might slow things down — even though it would be built on top of 23-year-old council-tax banding that is close to obsolete. However, the impact of seven per cent stamp duty on homes above £2 million has been marginal. The same is likely to apply when capital gains tax on foreign owners of UK property comes in next year.

More likely, it will be other banks that follow the lead of Lloyds and tighten lending criteria. How ironic that it is the banks who seem most concerned about recklessness in the housing market this time around. And for the outliers, Andrew Bailey at the Prudential Regulation Authority is particularly looking out for banks who look like becoming the next Northern Rock — whose mortgage book is coalescing around high loans-to-value.

Rather than regulatory restraint or borrowing caps, the way to calm things down in the least disruptive way is to attack the problem from the other end — crank up supply. That will take a while. Britain is building about half the homes it needs to keep up with demand: 130,000 units a year compared with 200,000 in 2007 and the long-term target of 250,000.

A British Property Federation survey found that London output shot up last year, with 21,000 new homes sold compared with 13,000 units in 2012. Only a third of those were being bought by owner-occupiers, with buy-to-letters grabbing most of the rest and foreign buyers picking up half of new prime central London homes.

Speeding up takes time, with experts predicting UK volumes can accelerate by no more than 15 per cent a year. Citing access to land, a skills shortage and a focus on profitability, most housebuilders don’t want to go much faster.

It all points to more of the same, with prices continuing to rise, only at a slower pace. Meanwhile, a council of the willing are failing to solve London’s biggest social problem of housing — and the linkage of shortage and affordability. The valuations might be astronomic but they just don’t make four-bedroom family homes in Putney any more.

James Ashton: Only new homes can prick the property bubble

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