London housing bubble inflates further

LONDON house prices soared to more than 12-times the average income in June, official figures showed yesterday, as economists warned the boom could prove unsustainable.

Government policies to keep interest rates low and help first time buyers onto the property ladder are pumping up a bubble, analysts said.

The average price in London shot up 8.1 per cent in the year to June to £425,000 – 12.5-times the average salary, which Capital Economics estimates at £34,000 in London.

“This is higher than is sustainable and we expect the ratio to come down,” said economist Matthew Pointon, warning the bubble may get bigger before it bursts. “The mortgage guarantee part of the Help to Buy scheme is particularly terrible – if it works it will create a bubble in house prices, which will also eventually have to come down.”

The scheme will see the government guarantee a portion of the mortgage of a borrower with a small deposit, reducing the risk to banks of lending to these buyers.

It comes after 10,000 buyers signed up to a government scheme to gain equity support in their purchase of new build homes.

Minister Eric Pickles said the scheme is “giving the confidence to house builders to build more.”

Across the UK prices increased 3.1 per cent to £242,000, with the south east rising 2.9 per cent to £299,000.

Without any easing of planning rules to allow more building, government stimulus combined with factors like a rising population are expected to make the imbalance of demand and supply ever wider.

“The government’s clear ambition to trigger a mini house-price boom (bubble) in the south east of England in the run-up to the general election in 2015 appears well on course,” said analyst Neil Prothero from the Economist Intelligence Unit.

“Unfortunately, there’s still little sign of an accompanying rise in housing construction. The ever widening regional disparity in the UK housing market between south-east England and the rest appears unsustainable.”

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