London property prices are at insane levels. It’s something we’ve covered in depth. But both Bank of England governor Mark Carney and chancellor George Osborne have been reluctant to do anything to stop it.
Instead, they’ve both been saying: “not my fault, guv”. Osborne insists it is the job of the Bank to keep the housing market in line. Carney has in turn passed the buck right back to Whitehall, blaming a lack of supply.
It’s obvious that they both want the boom to continue for as long as possible. At the very least, they don’t want prices to fall before the general election in May next year.
However, this inaction has provoked growing criticisms with everyone from the IMF to the European Commission to former chancellor Lord Lawson chipping in.
So Carney has now outlined three main measures to cool the housing market. But will they have much impact?
We suspect not. Two are much weaker than they appear. Firstly, banks will be forced to ‘stress test’ loans, to ensure that they are ‘affordable’. Carney explicitly defined this as assuming that interest rates will be 3% higher than they are at the time when the loan is made.
Banks will also have to limit their high loan-to-income (defined as greater than 4.5 times income) lending to 15% of their portfolio.
The trouble is that the first measure has been largely pre-empted by the Mortgage Market Review, which came into effect in April. This forced banks to consider affordability and suggested a large number of guidelines, including stress testing.
Similarly, as Carney admitted, the limit of 15% of high loan-to-income loans is actually higher than the current level of such lending, which is 10%.
All in all, it very much looks like Carney is trying to get away with doing as little as possible. Indeed, he says these measures are intended to prevent a bubble from developing, implying that he thinks that things are currently fine.
A sting in the tail
However, there is one measure that might have an impact on the London market. Carney signalled that Osborne has agreed that loans that were more than 4.5 times income would be completely excluded from the second part of Help to Buy.
Right now, the average London house price is at a record eight times the average income of first-time buyers.
Defenders of Help-to-Buy argue that only 5% of the total loans have a loan-to-income above the 4.5 times mark. But this proportion is likely to be much higher for loans on London properties (London and southeast England account for around 20% of Help to Buy guarantees).
Today’s outcome might also end up being good news for savers. That’s because Carney has two options to rein in the bubble – direct controls on lending, and interest rate hikes. This means that ironically, his reluctance to introduce tougher controls may mean that he is more likely to hike rates.
Tony Wilson of foreign exchange firm FEXCO agrees. “By making it clear that the new measures are not an alternative to rate rises”, Carney is now more likely to have to hike rates early.
London prices may have peaked anyway
There have also been some recent signs that the market may be getting a little less crazy in any case. Earlier this month, Rightmove recorded the first monthly drop in London asking prices of 0.5%, with the number of sellers increasing by 20%. Meanwhile, property services firm LSL reckons that areas like Kensington & Chelsea and Westminster have also seen drops of nearly 3%.
These numbers aren’t yet reflected in the Land Registry house price index. But the Land Registry only looks at data when the sale takes place. The Rightmove data looks at asking prices (the prices that houses are listed at) on its website.
Now it’s true that the Land Registry data looks at a broader range of figures and is based on deals, rather than just what the householder (or estate agent) thinks they can sell for.
But even in this mad market, it takes time to show people around, negotiate an offer and then comply with all the legal and financial steps. The entire process usually takes at least a month or two. This means that by the time a deal shows up in Land Registry records, the market might have shifted.
This is compounded by the fact that the Land Registry takes some time to compile the data, so is still reporting figures for April, while Rightmove is dealing with this month.
We’ll need to wait and see which is right – and the Land Registry produces its figures for May tomorrow – but as we’ve been saying, if it does start to drop, the London market has a long way to fall to get back to its historical prices to incomes ratio.