UK university claims UK property market not in bubble, but London might be
Academics at Lancaster University have released their 'UK Housing Observatory' report, in which they claim the UK is not in a property bubble, despite prices currently being at a historic high. However, the same report claimed that London is on the cusp of a housing bubble, which could affect surrounding regions. They predict that a bubble in London property prices could result in a crash in 2017, if prices continue to rise at the same rate. 

Britain's expensive property market is not in a bubble, academics at Lancaster University have claimed.

Its UK Housing Observatory report says that even though UK prices are currently at historical high, exceeding peaks seen in 2007, there is little sign of exuberant rises at a national level.

But London is on the cusp of a housing 'bubble' which could ripple out to surrounding regions, it said.

The report said: 'Historical evidence suggests that phases of exuberant house prices are often followed by a sudden crash, leaving homebuyers with large mortgages and negative equity.'

Storm clouds: A university report suggests the London property market bubble will pop in 2017 - and it could have a devastating ripple

Property prices in the capital are up 11 per cent in the last 12 months, based on the Nationwide regional house price data analysed by Lancaster University. At £443,400, the average London home is up 83 per cent on the recent low reported for the first quarter of 2009.

The report – which is the first in a new quarterly series - added: 'There is evidence that London is leading the UK national housing market - the so-called ripple effect - and there is therefore a risk of bubble-type behaviour spreading to surrounding regions, and from there to the rest of the UK.

'Such concerns are supported by the indicators of the London outer metropolitan area, which have been increasing over the past year.

'If real house prices in London continue growing at 2.75 per cent every three months, they will enter into bubble-type behaviour phase in six quarters.'

This suggests a London bubble could be blown in 2017, if prices continue rising at the same rate.

The last time the London market was seen to be in an 'exuberant phase' was the final three months of 2007, just before house prices suffered their financial crisis crash.

The index is based on econometric techniques developed by Yale university economist Peter Phillips.

It measures real house prices (those adjusted for inflation) against real personal disposal income. The findings highlight the gulf in the UK property market, with London seeing the ratio rocket to new highs, while areas such as the North West have seen it fall, albeit to levels that are still high by historic standards.

Professor Ivan Paya, author of the report, said: 'Boom and bust in housing markets has a major impact on people's lives.

'UK housing prices have reached a new high, surpassing those of 2007, and it's important we try to anticipate the kind of price crashes that lead to negative equity and hefty, disproportionate mortgages.

'Crucially we need clear-sighted information based on rigorous analysis and not scare-mongering.

'The report was set up with this in mind - bringing serious thinking on econometrics to bear on what's happening to house prices.

'The first analysis suggests London is heading towards what we call "exuberance", a bubble of overpriced property, if prices continue to rise at the same rate over the next 18 months.

'There is the potential of a "ripple" effect to the outer London metropolitan area - also seeing higher than average prices rises - and eventually nationally.'

London vs North West: The top graph shows how the house price ratio against disposable income is rising in London - in the North West (which has a vertical axis set low) the ratio is far lower

Not in a bubble: The report's chart for the UK shows that UK house prices to personal disposable income is not showing signs of bubble exuberance (these periods are shaded in grey)

Land Registry data last week suggested the average London house price has now hit £500,000.

And the London property market's rapid inflation has long spread out of the prime central areas and into the wider market in the capital.

Much of the new found bumper growth in the capital over the last 12 months was found in areas that had previously lagged behind more 'sought-after' central parts.

For example, Barking and Dagenham, Bexley, Enfield, Greenwich, Harrow, Havering, Hillingdon, Newham, Redbridge and Waltham Forest have all recorded double digit percentage growth compared to last year.

Hammersmith and Fulham, on the other hand, was the only London Borough to record a fall, of 0.5 per cent.

In the two areas where average house prices are more than a million pounds – City of Westminster and Kensington and Chelsea – prices were up a slower 2.6 and 2.3 per cent respectively.