What's a normal market for London and is it really in a bubble?

publication date: Mar 31, 2014
 | 
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

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What is a normal market for London and what a bubble really looks like!

The latest headline from the Evening Standard claims London is in the 'biggest bubble ever' with regards to property prices.

As usual, this is pure sensationalism based on no evidence at all, bar some comments from the Prince of Wales, Shelter and a broker, coupled with research from the Discovery Channel.

Personally, I prefer to trust organisations like the Land Registry which has property prices going back to 1995 online, sold property prices which go back to 2000, and companies who know their data, such as Savills and Hometrack.

FIND OUT WHAT'S HAPPENING IN EACH LONDON BOROUGH


So what's a normal market for London and outside of London?

On average, London prices, since 2000 have increased by 7% year on year, so that's throughout a boom and a crash. The highest increase year on year was 29% which happened in April 2000. Outside of London, since 2000, property prices in most areas have increased by around 6% per year, again throughout a boom and crash. The highest increases year on year were 42.7% which happened in Liverpool, in July 2004!

FIND OUT WHAT'S HAPPENING IN EACH LONDON BOROUGH

Whats a bubble?
Well this is classed as a time when prices are increasing at an 'unsustainable rate'. In other words, properties are being sold at artificially high prices, and something is going to happen which will burst the bubble and bring them down.

In 2007, this included:-

  • Interest only mortgages
  • Self-certification mortgages were rife, with no checks
  • Mortgages being offered at 125% of their value
  • New build properties being sold in city centres at twice the price existing properties were selling for 
  • There was a view that property prices would always go up 


But in 2014 things are very different:-

  • Self certification mortgages will go when MMR comes in, in April
  • Most mortgages are now repayment 
  • 95% is the highest you can typically secure for a mortgage 
  • The new build properties previously sold at huge costs are now being sold for up to half the price 
  • People know prices can come down as well as go up

There is also five years of pent up demand - and buyers who have saved far more than would have done in a normal market, so it's not a massive surprise that there is so much demand in London while prices are being seen to rise.

But this excess demand is short term - it is likely to last a year or so, perhaps even slowing by the end of 2014.

So in reality, things are VERY different in 2014 versus 2007 and the Evening Standard article doesn't explain any of these differences. 

And when you look back in history, the price increases related to a bubble were 30% plus year on year, so we are no where near these kind of levels.

Does this mean these price rises are sustainable?
No it doesn't, but it does mean the rise in prices is unsustainable, which is very different to there being a bubble. Price increases in London are expected to slow down come 2016/2017 to around 3%, away from the current 5-10% we are seeing.

FIND OUT WHAT'S HAPPENING IN EACH LONDON BOROUGH

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