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What Will Happen to London House Prices


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London House Prices have doubled in the past 6 years.

Reasons why London House Prices may Fall?

1. Interest rates have been increased 4 times in the past 9 months. This increases the cost of mortgage repayments, making it less attractive to buy. Although, the interest rate has only increased by 1% it is still quite a significant factor. This is because:

  • To get on property ladder first time buyers have borrowed a high income multiple. Mortgage payments are a high % of disposable income, therefore, a small rise in interest rates causes a big reduction in disposable income.
  • Increasing number have interest only mortgages. This means that they are more sensitive to interest rate changes.
  • Interest rates may rise further. This is because the bank is committed to reducing inflation closer to 2%

2. House prices have risen faster than income.

This means it is increasingly difficult for first time buyers to get on the property ladder. Many houses are now out of reach of key public sector workers.

3. Speculation.

The London housing market has seen foreign investors buying houses to try and make capital gains. If house prices slow down or even start to fall they might sell to cash in on their gains. The London housing market is more volatile than the rest of the country, swings in house prices tend to be more extreme; this is partly because supply is very inelastic.

4. Downturn in the Economy.

A slowdown in economic growth will lead to lower bonuses and smaller wage increases. Therefore, city workers will be less willing to spend extravagant sums on expensive housing. The economy may slow down as a consequence of rising interest rates, and slowdown in housing market

Why House Prices in London May Continue to Rise:

1. Prices have risen because of economic fundamentals. Demand has been increasing greater supply. In London, there is a fundamental shortage of housing.

2. Supply very inelastic in London. Rising house prices have not led to increased homebuilding, because there is a shortage of space to build houses.

3. Demand has been rising for various reason:

Demographic factors - increased number of households. Rising number of households due to more single people; e,g old people and higher divorce rates. Rising immigration, especially from eastern europe, e.g. countries like Poland. Foreign investors buying second houses as an investment.

4. People are willing to pay higher prices and borrow more.

New types of mortgages have enabled people to borrow higher income multiples

5. The price of renting has been increasing faster than inflation. Therefore, people might as well try to buy.

About the Author

Richard Pettinger studied Politics and Economics at Lady Margaret Hall, Oxford University. He now works as an economics teacher in Oxford. He enjoys writing essays on Economic and he edits an Economics Blog focused on UK and US economies:

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Article Published/Sorted/Amended on Scopulus 2007-05-30 00:59:10 in Economic Articles

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