It was Samuel Johnson who said that “...when a man is tired of London, he is tired of life; for there is in London all that life can afford”. In other words, everything that you could possibly want to do can be found in London, however one suspects that nowadays many people might suggest that if you want to live in an ‘affordable London’ you might have to look for a long period of time.
Whether we might like it or not, London tends to dominate the UK in all manner of ways and it is certainly at the heart of UK plc. This domination comes with the fact that Government is housed here, so are most of the major media outlets, and it can often seem like another world entirely when compared to other regions of the UK. London can appear like some sort of black hole into which everyone and everything is somehow pulled towards – we cannot escape this pull and it therefore tends to take on a life of its own whilst at the same time having an influence over all other parts of the country.
The ‘London effect’ is well-known in many circles and its influence continues to grow to such an extent that there have been arguments put forward to suggest London should no longer be the capital of the country. Instead, moving the home of the Government out to a different city would provide benefit not just to that specific area but also to more of the country as a whole. The feasibility of this is clearly in question however other countries have opted for such an approach, for example, Australia where Canberra is the capital and seat of Government rather than say Sydney or Melbourne.
The criticism is that London’s influence is too great and perhaps we are seeing this in full effect with the way policy is shaping up in today’s mortgage and housing market. The very latest Nationwide house price index suggests that house price inflation in the capital is running at 25% higher in quarter two this year than in the same period in 2013. This means that the average house is now priced over the £400k mark in London for the first time ever – prices are 30% higher than the 2007 peak.
These increases are certainly concentrating the minds of both politicians and the Bank of England given that they appear unsustainable and provide major issues for how ‘hard working families’ [to coin a political phrase] can find homes to live in within the Capital. The Bank also does not want people to overstretch themselves trying to afford these types of prices which is why we have had the most recent loan-to-income and stress-test proposals announced last month.
We should be in no doubt that London is the driving force behind these measures however they are not just merely London-specific and will have an (albeit limited) impact in other areas. However, just how successful will these policies be in London? Lenders have already implemented the MMR rules and regulations, which are also designed to ensure affordability and cut out over-stretching, and the Bank itself admitted that in the very short term at least these new proposals will not affect the housing market. It suggested however that, by this time, next year lenders would be hitting their 15% new residential mortgage business limits at 4.5 times income and they’d have to put the lending brakes on then.
But, what happens up until that point? Mortgage availability has been curtailed, but we know London is ‘another world’ where there are a much larger proportion of a) foreign buyers and b) cash buyers. Stifling mortgage availability will not impact these purchasers. Therefore we should perhaps expect London prices to keep on rising for some time and one wonders if by the time we get to 2015 the Bank will feel ongoing pressure to intervene further and faster.
Whatever the level of intervention, the Bank cannot influence the supply of housing in London or anywhere else and this lack of supply is a major contributory factor to rising prices. We should also not forget a major risk, which is often overlooked, and that is the vast majority of high LTV mortgages which are not protected by mortgage insurance. Introducing a system like in Australia where the incentive is to protect those higher LTV loans would fundamentally help the cause in terms of ensuring affordability criteria is maintained and that underwriting policy does not slip while chasing business. This would be as desirable for lenders operating in Camden as it would be for those in Cleethorpes.
So, while there are solutions to help keep the housing market in check throughout the country they require joined-up thinking and a commitment to a sustained and sustainable approach rather than occasional piecemeal intervention. Ultimately, making decisions which are London-centric may end up not achieving their aims and causing unintended consequences across many other areas of the UK.
