London’s housing market is on the cusp of a bubble, which could spread to the rest of the UK, according to new research.
Economists at Lancaster University’s Management School cautioned that if house prices in London continue growing at a rate of 2.9% per quarter, the market will reach bubble territory before the end of the year.
In 2014, fears mounted that a bubble was developing after annual prices in London, as measured by the Office for National Statistics, surged by more than 20% on an annualized basis in May that year.
Annual house price growth slowed to as low as 4.4% in April 2015, but has started to pick up again, reaching 9.8% in November. This has pushed average prices in the British capital up to a record £537,000.
Higher prices have been driven by the continuing imbalance between supply and demand and the research from Lancaster University said the last time national house prices were identified to be in bubble-like territory was the second quarter of 2008 when the financial crisis struck.
The report also warned that this trend could spread outside of London to surrounding regions, and from there to the rest of the UK.
Oxford Economics, a consultancy, has forecast that the average price of a property will be £1 million by 2030, making it even more difficult for first-time buyers in London to step onto the property ladder.
Nevertheless, the warning that a bubble could emerge may not deter international buyers from snapping up London homes.
While higher stamp duty rates introduced in December 2014 on more expensive homes have dampened demand among some, the majority of analysts believe that foreign investors still view London as a safe haven for their money.
There is also expected to be a rush to buy second homes and rental properties in London ahead of the additional 3% stamp duty charge that the finance minister is introducing for these specific buyers at the beginning of April.
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