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April 17, 2014

John Phillips is financial services director at Kinleigh Folkard & Hayward

 

Nationwide recently released data that showed UK average house prices are rising by near 10% per annum to £180,264 – just 3% away from their 2007 peak.

However, London has been in a raging bull market for well over a year with prices rising by 18% per annum putting the average at £362,699. This is significantly more than the rest of the UK and actually places London property at 20% above London’s 2007 peak.

Is it sustainable? If we mistakenly focus on measures of affordability, it’s easy to conclude that we are in a bubble but this takes no account of what actually drives a market – namely either positive or negative sentiment.

Many people who have patiently waited for prices to fall or even crash have now realised that it is just not going to happen and in increasing numbers feel they have to move now as they witness homes they have been viewing sold and asking prices moving ever higher.

As house prices rise, home owners see the value of their houses rise by thousands per month, which encourages many to borrow more. Ultimately as house prices rise so does positive sentiment which is what underpins a market.

When your house is worth more, you feel wealthier and more confident.

This demand from UK residents and foreign buyers has been exacerbated in no small part by Help to Buy. The scheme has been helpful but effectively injects 20% of tax payers money into the value of homes. It leverages the entire market because it is not just the marginal transactions that benefit but all because house prices are relative to one another. If my neighbour’s home is sold at a premium, mine goes up too as long as demand remains.

There is no obvious end in sight to this rising tide of sentiment in the nation’s capital.

Buckle up and enjoy the ride.

 


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