Feb. 3 (Bloomberg) -- London led an increase in U.K. home prices last month, a report showed today, as Ernst & Young LLP’s Item Club said the city’s property market risks overheating.
Home values in the capital rose 0.6 percent from December compared with a national gain of 0.3 percent, Hometrack Ltd. said in an e-mailed report in London today. In a separate release, Item Club said the London housing market was beginning to show signs of “bubble-like conditions.”
Mortgage approvals are at an almost six-year high amid a property revival fueled by an improving economy and government incentives. Increasing values prompted the Bank of England to end its support for home loans last year and BOE Markets Director Paul Fisher said last month that sharply rising prices are a potential source of financial instability.
“Underlying market conditions remain strong with the market starting 2014 in a better position than a year ago,” said Richard Donnell, director of research at Hometrack. “Positive news on the economy and jobs is set to support demand in the coming months.”
Values in the regions of East Anglia and southwest England rose 0.4 percent, the property researcher said.
January’s national increase was the 12th in a row and the result of the largest imbalance between supply and demand since 2009, Hometrack said. From a year earlier, U.K. home values advanced 4.8 percent.
The number of properties for sale dropped 6.6 percent, taking the total decline over the past five months to 17 percent, Hometrack said. London and southern England posted the largest declines in supply.
While the housing market in the rest of the U.K. has returned to “normality,” price gains in London have pushed both the value-to-income ratio and average-income multiple to the highs seen before the financial crisis, Item Club said. Officials on the BOE’s Financial Policy Committee should be prepared to take more action, such as imposing a limit on income multiples, it said.
“London, which is suffering from a combination of strong demand and a lack of supply, is increasingly giving us cause for concern,” Andrew Goodwin, an economic adviser to the Item Club, said in a statement.
Demand has been partly fueled by a government incentive program known as Help to Buy, which guarantees loans to those who can only afford a small down payment.
Home prices will rise 8.4 percent this year and 7.3 percent in 2015, before growing about 5.5 percent a year thereafter as Help to Buy comes to an end and borrowing costs increase, Item Club said. By 2018, the average value of a London home will be almost 600,000 pounds, it said.
The widening gulf between the capital’s housing market and the rest of the country is complicating the government’s policy choices. Prices increased 11.6 percent in London in the 12 months to November, the latest for which official data are available, according to the Office for National Statistics. Excluding the capital and its commuter area in the Southeast of England, prices rose 3.1 percent.
An index of U.K. consumer confidence fell from a six-year high, a report from Nielsen showed today. The share of Britons who believe the country is still in a recession also fell, the consumer research group said in an e-mailed statement.
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