London house prices overshoot even the wealthy

London house prices overshoot even the wealthy

As if Swedish football coach Sven Goran Eriksson did not have enough on his plate trying to revive the English national team's flagging fortunes; first he has to negotiate his way through the booming London property market.

Like other foreign celebrities, such as pop diva Madonna, Eriksson has reportedly been shocked to find that his two-million-pound-a-year salary does not go very far when looking for a place to live in the bustling capital.

But with pundits predicting a fresh rise in London property prices this year, Eriksson is not alone in feeling priced out of the market.

London may be a cheaper place to live than Tokyo or Osaka, but it remains the most expensive place in the European Union, according to an Economist Intelligence Unit report.

With Britain's economic fundamentals still strong, particularly in the key London economy, demand for housing will remain robust and rents will rise too, housing analysts predict.

Estate agents greeted 2001 with a post-Christmas rush, as buyers emerged to compete for a limited supply of properties.

"We have been very busy since Christmas with a packed diary of viewings every weekend," said Martin Dixon, agent at Martin Barry in Brixton, an up-and-coming south London neighbourhood which in the 1980s was torn apart by race riots.

House prices - a key indicator in Britain where most people own their homes and have much of their wealth tied up in them - soared in 1999 and early 2000 until a cocktail of interest rate rises and higher taxes on property transactions hit the market.

The stronger January market follows a slide in prices around the middle of last year, when prices fell as much as 10 percent in some central London areas such as the ever-trendy Notting Hill and leafy South Kensington.


"London's economy is resilient and is increasingly securing its position as Europe's financial centre, so the outlook for housing looks good," said Rob Thomas, analyst at UBS Warburg.

The upbeat outlook was confirmed this week by a report from the Royal Institution of Chartered Surveyors (RICS), which tracks house prices across Britain.

For a third consecutive month, RICS found more surveyors reporting price rises than falls and expectations regarding future prices stood at their best level for eight months.

"The underlying economic fundamentals are good and house prices in the London region appear to be rising at a steady pace, but not as fast as the marked pick-up in late 1999 and early 2000," said Milan Khatri, chief economist at RICS.

Any rise in prices, even if it gathered pace this year to around 10 percent, is unlikely to trouble the country's central bank which will worry only if house prices start to soar.

Surging house prices make people feel more wealthy, fuelling household spending, even though price gains are largely illusory because moving up the property ladder becomes more expensive.

The picture of rising prices is not, however, without potential storm clouds, not least the slowing U.S. economy which could threaten Britain's economic growth rate.


But, at least for now, activity appears healthy, partly because any slowdown in economic growth is likely to herald cheaper borrowing costs as interest rates fall. And, analysts say, in a low inflation environment of the kind Britain appears to have achieved housing can undergo a re-rating because low interest rates mean buyers can afford more.

While London prices have risen sharply in recent years - more than doubling in certain areas - analysts say key measures of affordability are not as stretched as popularly suggested.

"House prices in relation to average (male) earnings in London stand at 4.45 times, above an average of around 3.9 but below a peak of 5.5 times seen when the London market overshot on the upside in 1988, said Warburg's Thomas.

In contrast with the 1980s when mortgage rates averaged 12 percent, most home buyers now pay around 7.5 percent, with many paying significantly less, thanks to Britain's strong inflation-fighting performance in recent years.

Last year, according to data from the Nationwide Building Society, house prices in greater London jumped 13 percent compared with an average rise across Britain of 9.4 percent.

"There seems to be enough momentum behind London to achieve solid growth this year - it would take a dramatic reverse in financial markets or a recession to harm it, which looks unlikely," said Alex Bannister, economist at the Nationwide.

"There is still a shortage of property for sale and many people in the market can trade up relatively easily because they have a lot of equity in their property," he added.

Bannister said London house prices now stand around 5.0 percent higher in real terms (adjusted for inflation) compared with their long term average, compared with 50 percent out-performance when the market was seriously overvalued in the summer of 1988, just before a major housing market crash.

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