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London’s housing market risks entering bubble territory according to Ernst and Young report

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London’s housing market risks entering bubble territory according to Ernst and Young report

NewEurope refers in one of its articles to a research report on Housing market in the UK issued by Ernst and Young Item Club (EY ITEM Club) on 3 February. While saying that  the housing market in London is beginning to show signs of bubble-like conditions, the report asks the UK government to monitor the trend closely and be prepared to intervene.

The EY ITEM Club forecast showed the average house price in London is expected to reach nearly £600,000 by 2018, some 3.5 times the average price in Northern Ireland and more than 3.3 times the average in the North East.

It said the average house prices in Britain growing by 8.4% this year and 7.3% in 2015, before cooling to around 5.5% in 2016.  House prices would show a regional divergence. Outside of London and the South East, the regions with the highest levels of house price growth are expected to be the South West and East of England, both set to grow by 6.2% from 2013-18.

In contrast, the North East is expected to have the lowest level of price growth at 4.2%, with Scotland at 4.5% and the West Midlands at 4.6%.  The report said income multiples are now back to pre-financial crisis levels in London, with homeowners taking on ever larger mortgages. Caution on the part of borrowers and lenders should prevent a serious problem developing.  The EY ITEM Club suggested a macro prudential intervention over higher interest rates, so the Bank of England’s Financial Policy Committee (FPC) would need to play a central role. If it decides to intervene it should be to impose a formal limit on income multiples.

Andrew Goodwin, senior economic advisor to the EY ITEM Club comments: “House prices across most of the country remain well below their pre-crisis peaks and there seems little danger of a bubble developing. But London, which is suffering from a combination of strong demand and a lack of supply, is increasingly giving us cause for concern.”

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