Academics give stark warning over threat of London housing bubble

A body called the UK Housing Market Observatory - consisting of economists at Lancaster University Management School - is giving a stark warning that Greater London’s housing market could crash, possibly in 2017. 

The body’s latest quarterly survey of the UK market reads, in full:

Although UK property prices are currently at historical highs, exceeding their peak values of 2007, there are no signs of exuberance (ie bubble-type behaviour) at the national level.

London house prices, on the other hand, which rose by 11 per cent in the past year only, are very close to entering an exuberant phase. 

Historical evidence suggests that phases of exuberant house prices are often followed by a sudden crash, leaving homebuyers with large mortgages and negative equity. 

Moreover, there is evidence that London is leading the UK National Housing market (the so-called ripple effect) and there is therefore a risk of bubble-type behaviour spreading to surrounding regions, and from there to the rest of the UK. 

Such concerns are supported by the indicators of the London Outer Metropolitan area, which have been increasing over the past year. If real house prices in London continue growing at 2.75 per cent per quarter, they will enter into an exuberant (or bubble-type behaviour) phase in six quarters.

In the economists’ background material leading to their conclusion, they argue that the last time that Greater London real house prices were identified to be in an exuberant phase was the fourth quarter of 2007 - just before the credit crunch and housing market downturn. 

Just as ominously, it claims that the last time that the ratio of London real house prices to London real personal disposable income was identified to be in an exuberant phase was the first quarter of 2007. 

“However, it is interesting to note that the statistic has been increasing over the past two years and is currently close to its critical value, signalling prices could soon move to an exuberant level” says the economists.