What can be done to tackle disproportionate house price rises in London?

KIS Finance 26th October 2016

According to the property website 'Rightmove', property prices in and around London reached another record high this February. This has been a recurring trend in London for some time. Even during the recession when most parts of the UK experienced falling house prices, many parts of London still had positive rises in prices. Therefore with the economy well on the mend, it is hardly surprising that house prices are now growing at a rate of over 20 per cent per annum in some parts of London.

Property prices are quickly growing all over the UK, caused by an improving economy, confidence, lenders who have their appetite to lend back, a growing population and a shortage of new homes being built.

The demand for new homes is very strong. We should be building approximately 240,000 new homes per year but are in fact only building half this amount. By meeting the growing demand for property this would help slow down the rise in house prices. In order to achieve this we need more development land to build houses on. We also need more building materials, more builders, carpenters, plumbers, roofers, electricians, etc.

In London there is a massive demand for property and a real shortage of development land to on, hence the reason why there are so many flats in London. The shortage of development land is a problem that is difficult enough to solve throughout the rest of UK, so a massive problem for London.

In addition foreign investors recognise London properties as being a great investment with a huge number being purchased by investors from Russia, China, India and the USA. This just further reduces the supply of houses and pushes prices up further. There is an irony here because over the years Londoners have purchased many holiday homes in popular locations. This has resulted in large price rises for properties in these locations that have left the local people struggling to afford to buy a home and forcing many to leave the area.

So what can be done?

MMR immediately caused many people problems in obtaining the mortgage that they required, and is certainly having the effect of reducing the amount that people can raise on a mortgage. It will take some time before the effects of MMR can be seen.

The Bank of England’s proposed measures to tackle rising property prices are nothing that the MMR regulations are not already dealing with. Remember the rising prices before the credit crunch were fuelled by unaffordable self certification mortgages, which are now a thing of the past.

Basic economic principles suggest that the best way to slow the house price growth is to increase the supply of properties, easing demand and therefore prices. This is a big task for most of the UK and probably an impossible one for London.

Because the supply of properties in London is so difficult to increase, perhaps the massive demand for property in London needs to be targeted. Ultimately the huge demand is caused by over centralisation and perhaps the recent Government policies to develop other cities may help to reduce some pressure. Also improved transport facilities into London may encourage more people to buy their homes outside the city and commute. New technology is also making it easier for people to work from home, which helps to persuade some workers to live away from work, perhaps even buying something peaceful in the country.

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