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We need to talk about house prices

As house prices soar above wages, inflation and the economy in every region of the UK it can mean only one thing: Debt.

File photo dates 09/08/13 of Estate Agent's boards in Stockwell, London. House prices surged higher again in August as Government schemes and improved mortgage lending continued to fuel the revival in Britain's housing market.

If you’re renting in London and earn a moderate wage, then you already know house prices are a problem. If you live in another part of the country or have seen the value of your home soar then you might be quite pleased with the way property prices are going.

The latest house price data from the Office for National Statistics found that UK house prices increased by 9.1% in the 12 months to February, this is the fastest rate of increase since 2010.

But while the focus in recent months has been on the mega bubble across London and the South East, the latest data from the ONS has found that large swathes of the country are enjoying house price growth.

London is leading the way with house prices up nearly 20% in a year, however, Eastern England has seen prices rise by over 7%, and excluding the South East and London, prices are rising at close to 6% per year. This is well above the rate of inflation, currently 1.6%, and also wages growth, which came in at 1.7% for February. Even Scotland and Northern Ireland are experiencing growth well above the rate of inflation at 2.4% and 2.8% respectively.

A clearer way of looking at the UK housing market is carving it into two; London and the South East, and then everywhere else.



A watching brief
Looking at the latter first, if everywhere else is rising on average by 6% a year, then the Bank of England’s Financial Policy Committee, which is tasked with reducing systemic risk from the UK’s financial system, should watch closely.

While 6% annual growth isn’t exactly overheating territory, these price rises have taken place at a time when wage growth, even though it is rising, remains historically low. The average annual wage, which is just under £25,000 in the UK, is now 10 times less than the average price of a home in the UK, which is just under £250,000. This means one thing: Debt.

The latest ONS data also noted that prices paid by first time buyers were 10.5% higher on average this year compared with February 2013. In London this was much more, with average house prices now £63,000 higher than they were in 2013. For the average person, buying a house is either unachievable or you sell your soul to your bank manager.

Lending soaring
The mortgage market has found its feet in the past year, with the latest data showing mortgage approvals for house purchases have risen back to 2007 levels. This is still well below the 2001 peak, but if banks are willing to lend again and prices keep going up, the risk for the Bank’s Financial Policy Committee is that we see unsavoury lending practices coming back into fashion, remember 110% mortgages or 0% deposits?

Of course, you would hope we had learnt something from the financial crisis, right? For years we have been told that more debt is bad, but the warning may have fallen on deaf ears.

On an anecdotal note, a friend went to view a small two bedroomed house in one of the less salubrious suburbs of London recently and there were 30 other people already lined up to view it that day. On the Monday he received a call from the estate agent saying that it had gone to sealed bids and if he wanted to stand a chance then asking price was minimum… I hope the Bank of England is doing “secret viewings” to find out exactly what is going on, particularly in parts of London.



What’s the problem then?
For years rich foreigners have been blamed as the reason that London prices are shooting higher. However, rich foreigners tend to stick to the fashionable areas – Chelsea, Knightsbridge and the like. Although some say that this pushes other people out to the London suburbs, I just don’t buy this argument. Most people who buy in the suburbs could not afford the areas favoured by rich foreigners in the beginning, so it is hardly like they have been pushed out.

[What overseas buyers want from a London home]

The bubble is coming from somewhere else: More people living in London now than for decades seems like the most likely reason. A buoyant jobs market and the age old desire, hard-wired into our British brains, that we must own our own property by a certain age.

Perhaps the regulators would be better off leaving foreigners with money who choose to buy property in London alone. Instead they should blame the Government and the planning laws.

Firstly, the Bank of England should nudge the Government to do more to attract businesses and employees (migrants and natives alike) to England’s other cities. This would reduce the pressure on London and give the city a much-needed break from the constant strain on its resources.

This means better airports outside of London, more cultural attractions and, perhaps the biggest selling point, affordable homes. The second point is to enhance home building, which is rapidly being outpaced by demand.

House prices in the UK are a worry, especially in London, but you can’t blame the usual suspects. Hard working people who earn moderate wages risk getting themselves into too much debt if prices keep going up at this current pace.

There is no easy solution to this problem, but the Bank of England would be wise to try and widen its influence to include the Government, who has its part to play to ensure the UK’s housing market does not explode in spectacular style in the coming years.

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Kathleen Brooks is author of Kathleen Brooks on Forex, published by Harriman House.