Gap between prices in capital and country 'to widen'
Copyright 2004 The Financial Times Limited
Financial Times
September 8, 2004 Wednesday
SCHEHERAZADE DANESHKHU
If the number of extra households in London rises at the rate suggested by the Office of the Deputy Prime Minister, house prices in the capital are likely to pull further away from those in the rest of the country.
Since 2001, the gap has been closing. Relative to the UK average, house prices in London have fallen to their lowest level for more than five years, according to recent research from Halifax, the country's largest mortgage lender.
The rapid growth in the number of people wanting to live in London over the next two decades suggests that trend is likely to reverse.
Gavin Cameron, fellow in economics at Lady Margaret Hall, Oxford, said: "It will be impossible to meet the demand in London without major changes to the planning system.
"There cannot be more household formation in London without house prices being pushed up relative to the rest of the country."
The government's review of housing supply conducted by Kate Barker, a member of the Bank of England's monetary policy committee, found that over the past 10 to 15 years, supply had become almost totally unresponsive to demand because of constraints on land use.
Of the 143,400 homes built in England in 2003-04, only 19,400 were in London.
Many people, especially those working in the public sector, have already been priced out of the London market, leading to a slowdown in prices in the capital.
London house price growth peaked at 29 per cent in 1999 but other parts of the country have steamed ahead since. The fastest growing region has been the north, where prices rose by 36 per cent in the year to the end of the second quarter of 2004, according to Halifax.
"London has come off the boil because prices have risen so much higher than earnings that this has acted as a natural brake on the market," said Martin Ellis, chief economist at Halifax.
In the short term the trend of prices rising faster in the rest of the country - especially the north - relative to London would continue, Mr Ellis said. But in the long term, the ODPM's projections supported a widening divide in north-south house prices.
"In the current favourable economic conditions, the service sector has done very well and London is very dependent on services which has led to high housing demand," he said.
You can email me at Gavin.Cameron@economics.ox.ac.uk
Last updated: 15 Sewptember 2004.
