London House Prices Surge the Most Since 1987: Nationwide

London home prices jumped the most in 27 years in the second quarter as Nationwide Building Society warned that Bank of England measures to cool the U.K. property market won’t stem further gains in the short term.

Values in the capital surged 26 percent in the three months through June from the same period a year earlier, the biggest increase since 1987, Britain’s third-largest mortgage lender said in a statement. At an average 400,404 pounds ($686,700), prices in the city stand 30 percent above their 2007 peak.

On top of improving economic growth and record-low borrowing costs, demand for housing in London is being fueled by cash-rich buyers and foreign investors. While moves by the BOE last week to prevent Britain’s property market from overheating are unlikely to have a significant impact in the near term, the rate of increases in London may have topped out, according to Robert Gardner, Nationwide’s chief economist.

“The annual pace of growth in the capital will probably start to slow in the quarters ahead, given the high base for comparison from the third quarter of 2013 onward,” Gardner said. There is “anecdotal evidence from surveyors and estate agents that activity may be starting to moderate,” he said.

London home prices rose 7.6 percent in the second quarter from the previous three months, more than double the U.K. average of 2.9 percent, the lender said.

1980s Boom

The London borough of Lambeth saw the strongest annual gains in the city in the second quarter, with prices up 37 percent, followed by Camden with a 36 percent increase.

National prices rose 1 percent in June from May, the 14th month of increases, to an average 188,903 pounds, Nationwide said. That took the annual gain to 11.8 percent, the fastest year-on-year rise since January 2005.

In 1987, when Prime Minister Margaret Thatcher won a third term in office, British Airways was privatized and the Pet Shop Boys topped the music charts, Britain was in the grip of a boom that had seen prices in London double in less than four years.

That was soon to come to an end as the government began raising interest rates to battle rapidly accelerating inflation. The subsequent crash contributed to the early 1990s recession.

‘Limited, Gradual’

According to Nationwide, U.K. house prices, which peaked at 62,782 pounds in the third quarter of 1989, had fallen to 50,128 pounds by early 1993, a loss of a third in inflation-adjusted terms. In London, values plunged from 97,667 pounds to 66,573 pounds.

While the benchmark rate had doubled to 15 percent by the end of 1989, now there appears to be little prospect of a sharp rise in borrowing costs with BOE Governor Mark Carney stressing that increases, when they come, will be “limited and gradual.”

The benchmark rate, which has been held at a record-low 0.5 percent since March 2009, will reach about 2.5 percent in 2017, derivatives contracts show. Still, increasing expectations of higher borrowing costs may damp housing activity in the coming months, Nationwide’s Gardner said today.

Apart from signs of “a little” overheating in London’s buy-to-let market, the rest of the U.K. housing market isn’t in a bubble, according to Kate Barker, a former BOE policy maker and now an adviser at Credit Suisse Group AG.

Building Revival

“If you think it’s about people buying when they can’t afford to sustain their mortgages, but they’re buying now because they’re afraid of prices going up, I don’t think we’ve really reached that stage yet,” Barker said in a Bloomberg Television interview today. “We’ve been through a period where house building has been very low” and “mortgages have been very tight. As soon as mortgages start to ease, you’re bound to get prices rising pretty sharply.”

Booming demand for property saw construction growth accelerate in June, according to figures published today. An index of housing activity compiled by Markit Economics increased to 66.6, the second-highest reading in more than a decade, from 62.7 in May.

The threat of a property spiral prompted the BOE last week to introduce measures to prevent an unsustainable buildup of consumer debt, with Carney saying housing poses the biggest risk to the economic recovery.

The BOE’s Financial Policy Committee said it will limit the proportion of mortgages advanced by lenders at 4.5 times income to no more than 15 percent of new lending. The panel also said banks must decline loans to borrowers who fail a stress test based on the BOE benchmark rate rising to 3 percent.

Those decisions “are unlikely to have a significant impact on housing transactions or the pace of price growth in the near term,” Gardner said. Official action “should help to limit the risk of house prices becoming detached from earnings without derailing the recovery in the wider housing market.”

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