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London Housing Prices Stoke Frenzy, Alarm Bank of England

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A Row of Houses Stand in London
A typical London home now goes for 458,000 pounds ($771,000). Photographer: Jason Alden/Bloomberg

May 20 (Bloomberg) -- Rohit Sabhlok said he’s upset he lost a bidding war on a London house. Katy Barnes bought her home to avoid rising rents, while Holly Martin purchased hers as an investment. Both are hooked on a website that shows their property values soaring. Kay Durrant used her home’s growing equity value to pay bills.

Welcome to London’s frenzied housing market, where low mortgage rates and a dearth of properties for sale have sent prices rising in a year by an amount almost twice the average annual London wage. From centuries-old pubs to Mayfair clubs to the halls of Parliament, London is abuzz with talk of escalating values, foreign buyers with piles of cash and half-built garages selling for vast sums.

London’s housing boom “has become a mainstay of conversation,” said Paul Stenson, an asset manager at Dunbar Assets Plc as he sipped a pint of Aspall cider at Ye Olde Cock Tavern on Fleet Street, a pub dating back to 1549. “Never mind the hackneyed view of it being the conversation of dinner parties, it’s gone beyond that. It’s like the elevator music that’s constantly on play.”

Burgeoning demand amid the lack of supply, near record-low borrowing costs, government policies to stoke growth and a cultural obsession with property are among the factors feeding the property craze. Its effects are being felt across the economic spectrum from trophy-home buyers in central London to immigrants seeking shelter on the city’s outskirts to average families using homeownership as a means to a better life. A typical London home now goes for 458,000 pounds ($771,000).

Dominant Issue

Bank of England Governor Mark Carney on Sunday called surging home prices the No. 1 risk to the economy and listed possible policy responses, moving a step closer to taking action to rein in housing inflation. About two-thirds of respondents to Bloomberg’s monthly survey of economists predict Carney will take steps to cool the housing market next month.

Deputy London Mayor Edward Lister said housing is the dominant topic at City Hall and coping with residential planning has never consumed so much time or resources. “We’re moving stuff as fast as we possibly can,” he said. “The problem is everybody wants more housing for their families, but they don’t want it next to them.”

Pressure to get in on the action is mounting as concern grows that London prices will keep climbing. Asking prices rose to a record this month as all 32 of the capital’s boroughs logged increases, property-website operator Rightmove Plc said yesterday.

Bidding Fights

Average home values rose by more than 60,000 pounds, a 17.7 percent jump, in the 12 months through February, the most since July 2007, according to the Office for National Statistics. Bidding battles for everything from patches of grass to sprawling mansions to parking spaces and garages are now commonplace.

When Sabhlok, a 32-year-old management consultant, reached the final stage of bidding for a three-bedroom terraced home in south London’s wealthy Dulwich area, the sellers asked for a letter detailing his background.

It didn’t help and he lost out. Bids were already so high that the owners “didn’t care” about making even more money, Sabhlok said.

“People who have ridden the property boom over the past 25 years have all the power,” Sabhlok said. “They can choose when they sell and who they sell to.” When he later reached a deal for a nearby property, the sellers pulled out, saying they couldn’t afford to move. Sabhlok had to pay an extra 15,000 pounds to make the purchase.

Record Prices

Prices for first-time buyers reached a record of eight times average earnings in the first three months of 2014, compared with an average of 4.9 times income since 1983, according to mortgage lender Nationwide Building Society. Price gains in a year were almost double the 34,200-pound median annual income of a full-time London worker. Values are now about 25 percent higher than the previous peak before the 2008 financial crisis.

“There is a fixation with housing, house prices and the housing market,” said Mark Clare, chief executive officer of homebuilder Barratt Developments Plc. “You’ve got six years of demand that’s coming back.”

Katy Barnes bought a home in Tooting in southwest London in April 2013 because her mortgage payments would be about the same as the rent she’d been paying in Clapham about 2.5 miles (4 kilometers) away. She now regularly checks the Zoopla.co.uk website to see how much her property has gained in value and estimates it’s at least 14 percent and probably a lot more.

‘Quite Lucky’

“I was quite lucky to buy when I did,” said Barnes, 30, a research analyst for an advertising agency. “I bought a two-bedroom flat and I think I would struggle to buy a one-bedroom flat for the price I paid” now, she said.

The successful purchase made her one of a lucky few. Homeownership in London fell to 50.7 percent in 2011 from 59.6 percent in 2000, according to the Department for Communities and Local Government. It’s probably fallen to less than 50 percent by now, according to Bloomberg economist Niraj Shah.

A survey of Britons from ages 20 to 45 published last month by mortgage lender Halifax showed the proportion that want to buy a home and aren’t able to save for a down payment rose to 57 percent from 42 percent a year earlier.

Holly Martin, 28, a lawyer with PricewaterhouseCoopers Legal LLP, purchased a two-bedroom basement apartment with a backyard in northeast London’s Wanstead neighborhood with her boyfriend in October 2012. They bought with a plan to potentially acquire more properties and rent out their home as they accumulated wealth.

Moving Quickly

“Properties were flying off the shelves,” Martin said. “We had to move pretty quickly.”

Martin said she now checks the Zoopla website “all the time” to get a sense of her home’s value.

It’s not just homes selling like crazy. A yard in Chelsea measuring 55 feet by 40 feet sold for 84,000 pounds, despite not having planning permission for development. Six rundown garages also without approval in nearby Parsons Green were auctioned with a guide price of about 70,000 pounds. They sold for 10 times that. The former coach house in south London’s Camberwell area that housed its mayor’s car was put up for sale by the local government at almost 1,000 pounds a square foot, an asking price comparable to some luxury homes.

Surging home values have sparked concern the boom is unsustainable. That’s ratcheting up pressure to cool the market after the latest series of fresh signals pointed to property prices continuing to surge.

‘Bubble Territory’

“The London market is looking particularly frothy,” said Martin Beck, an economic adviser to EY’s Item Club, a research group sponsored by accounting firm EY, formerly known as Ernst & Young. “The onus remains firmly on the Bank of England to ensure that the market doesn’t enter bubble territory.”

Homes in the 10 wealthiest London boroughs have a total value of 609 billion pounds, broker Savills Plc said in January. That’s 9 percent more than all of the houses and apartments in Scotland, Wales and Northern Ireland combined.

Policy makers “could do more” to tackle home-price excesses if needed, Carney said in the May 18 interview with Sky News’s “Murnaghan” show. Options include imposing more checks on the affordability of mortgages, limiting types of loans or advising the government to rein in its Help-to-Buy program, which provides equity loans and mortgage guarantees.

The government has asked the BOE to look into the program and will listen to any recommendations it has, Prime Minister David Cameron said in a BBC Radio 4 interview today.

Stress Tests

The BOE’s Financial Policy Committee will publish its recommendations on June 26 and has said it’s ready to take more action if needed. It’s already ended incentives for mortgages and announced a set of bank stress tests that include a property-crash scenario.

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, said today it will limit loans to four times a buyer’s income for mortgages of more than 500,000 pounds to address “inflationary pressures” in London’s housing market.

The standard variable rate for home loans through April was 4.4 percent, according to data compiled by the BOE. The low interest rates are sparking demand at a time when building is failing to keep up with London’s population growth.

There were 3.2 million households in London in 2011 and the city had 3.4 million homes in 2013, according to government statistics. The city’s population is expected to grow by about a million people to 9.2 million from 2011 through 2021, according to a draft local government plan for the city.

‘Nothing Left’

Population growth since 2013 means households and homes are at about the same level for the first time in more than 40 years, according to Christine Whitehead, a professor at the London School of Economics who researches housing. The city is essentially full and “there is nothing left for vacancy or mobility or anything else,” she said.

Some desperate buyers are neglecting to weigh the costs associated with homeownership, the Money Advice Service said in a February report. Three quarters of first-time buyers in the U.K. spent more than their budget and some ended up in financial trouble after day-to-day maintenance and bills were higher than expected, it said.

Others who already own are drawing on rising values to unlock the cash they need for living expenses. The amount withdrawn through refinancing has increased 36 percent in two years as prices spiraled up, according to the Equity Release Council.

Cost Squeeze

Kay Durrant, 71, got 90,000 pounds by refinancing to help manage rising bills after realizing her pension would leave her at least 54 pounds short of her budget per month. Her three-bedroom terraced Victorian property has shot up in value since she bought it 30 years ago, she said.

“I didn’t have enough to run the house,” Durrant said. “I could have downsized or moved away, but equity release was the most convenient option.”

Housing is the biggest challenge facing London, Mayor Boris Johnson said in January. His goal is to get 42,000 homes a year built during the next decade.

Home building “went off a cliff” six years ago, Johnson said in an interview. “That has been the problem. It’s taken an awful long time to get the confidence back.”

Johnson foresees a boom in housing construction as part of a solution to the housing shortage. London has 200,000 land plots with approval for homes that have yet to be built, according to research by City Hall.

While the National House-Building Council says new-home registrations rose by 60 percent in 2013 to the highest level in at least 26 years, there were only about 26,000 new registrations last year, far short of Johnson’s goal. The pipeline of homes is 28,500 a year for the next five years, according to broker Savills Plc.

Bolstering the economy outside of London is the only way to reduce the city’s housing crisis because that would tempt Londoners to move away, LSE’s Whitehead said. “Otherwise I don’t see an answer.”

To contact the reporters on this story: Neil Callanan in London at ncallanan@bloomberg.net; Patrick Gower in London at pgower@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net Jeffrey St.Onge, Andrew Blackman

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