The return of house price inflation has raised concerns over the risk of a renewed housing bubble. The good news is that, across the vast majority of the UK, there are no signs of bubble conditions emerging. Prices in most regions are below previous peaks in cash and real terms.
Both affordability and household debt levels look much better than before the financial crisis.
The exception is London, where limited supply and strong demand have driven price-to-income ratios and income multiples back to previous highs, signalling the potential for overheating.
Over the next five years, a combination of improving economic conditions, rising employment and support from Help to Buy should ensure continued growth in demand and transactions UK-wide. But increased supply from house-builders should help to keep a lid on prices helping to constrain price growth and we expect UK house prices to rise by an average of 6.5% annually over the next five years.
However, this national figure masks stark regional differences, with London and the other southern regions pulling away due to combination of stronger employment and income growth and a more limited expansion of supply.
By 2018 the average price in London will be over three times that in Northern Ireland and the North East.
The conundrum for policymakers may be how to dampen London’s price pressures without choking off the recovery elsewhere. Changing the terms of Help to Buy is not the answer; we think that they should police income multiples in London while letting the market rule in other regions.
Peter Spencer, Chief Economic Adviser to the EY ITEM Club. Click here to watch the interview