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House prices hit £266K – are restrictions needed?

House prices hit £266K – are restrictions needed?

Category: Mortgages

Updated: 13/06/2014
First Published: 13/06/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

House prices have come back into the spotlight thanks to the latest House Price Index from LSL/Acadata, with it reporting house price growth for the 11th consecutive month – meaning average prices have reached a new peak of £266,013.

This is an increase of 8.5% – or £20,938 – over the year, the highest annual growth rate recorded since August 2010, while on a monthly basis prices have risen by 0.9%. However, despite this seemingly epic rise, taking a closer look at the figures gives an entirely different level of analysis.

London, as ever, is fuelling this rapid growth in house prices, but discounting the capital we can see that annual growth was a much more modest 6.3%. Looking in real terms, meanwhile, reveals further divergence.

The report analysed both nominal house prices and "real" prices, or in other words, prices that can be readily seen vs. those taking into account a measure of inflation. This paints an entirely different picture, as using the real measure of prices it's only London and the South East that have witnessed actual house price growth since 2005 – posting increases of 42.8% and 2.1% respectively – while all other regions actually posted negative growth.

This would therefore suggest that, in real terms, the majority of the country is a long way from a potential housing bubble, with the effects of inflation meaning prices are no higher now than they were almost a decade ago.

However, this probably won't do much to curb ongoing fears. As Dr Peter Williams of Acadata says, "the reality is that nominal prices are what people see and experience" – so even though real prices might be more economically accurate, they're not what we're actually seeing in estate agents' windows, and as such are generally discounted by the population.

But, there are further signs of market stabilisation elsewhere in the figures too. The report revealed that 12 London boroughs actually saw monthly price falls while annual growth in house sales slowed in May, but nonetheless demand for properties is continuing to put an upwards pressure on prices.

"If supply could follow suit, this would sustain the housing recovery and could help restore some equilibrium across the country," said David Brown of LSL, as increasing the supply of housing would be a key way to stop the onslaught of rising house prices.

But what about the Mortgage Market Review? It's hoped that this will have something of a constraining effect on the market, and with additional figures showing that the number of mortgage applications is beginning to slow somewhat, it could be having the desired effect.

It's too early to tell the full impact of the MMR as new affordability rules have only been officially implemented for the last seven weeks, but with lenders tightening their criteria and putting affordability at the top of the agenda, it should at least mean that the market won't return to a boom and bust situation with borrowers unable to make the repayments.

It was a bit of a shock to the industry, then, that Chancellor George Osborne announced plans to put further restrictions on mortgage lending. In his Mansion House speech yesterday he set out measures that would give the Bank of England additional powers to cap mortgage lending based on income multiples or property value, and it's been met with some criticism.

"George Osborne's announcement is effectively a step backwards for the market if it translates into direct action," said Brian Murphy of the Mortgage Advice Bureau (MAB), arguing that the introduction of the MMR has ensured lending is based on affordability with measures in place to keep it sustainable.

"Capping mortgages based on an income multiple completely fails to take into account personal circumstances and regional variations... variations in house prices mean a huge section of the population could be barred from accessing housing finance, particularly in London or the South East where prices are generally much higher than three times income."

However, other commentators have suggested that although the Bank will be given the power to restrict lending, it doesn't necessarily mean it will. It's hoped that time will be given to see the full effects of MMR before any additional restrictions are imposed, while another part of the announcement – where Mr Osborne proposed reforms to planning laws that could increase the supply of housing, potentially leading to some 200,000 new homes being built – could provide another part of the solution.

So, while house prices are certainly rising, hopefully there won't be too much cause for concern. In the meantime it's vital to find the mortgage that meets your circumstances as this in itself could help ensure affordability won't be an issue, as securing a decent rate now will mean your repayments can be easily covered.

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