While the word "bubble" is often overused with regard to financial markets, there are growing concerns about what seems to be the never-ending rise of house prices in the capital.
According to data from Rightmove, the average asking price for London houses has increased by £30,000 since the start of the year. At the top end of the market, a flat in Knightsbridge’s One Hyde Park was sold for nearly £30m in recent months.
Sceptics say that the market is only being propped up by foreign investment and ultra-low interest rates, so any change in either of those dynamics could devastate the market.
So does this mean that house prices in London will come crashing down or is this now the norm that the rest of the country will soon follow?
Experts agree that there has always been a historic north/south divide when it comes to UK property. However, shortly after the turn of the millennium, there was an abundance of people across the country who wanted to own their own home, as well as a ready supply of easily available credit.
When the financial system crashed in 2008, the excesses of the past were highlighted in all their infamous glory. No-one wanted to spend and no bank was willing to lend, leaving huge amounts of building projects unfinished or sitting empty.
However, the recession had a very different effect on the capital, as Alpha Real Property’s Steven Oliver explains.
"London has always been perceived as a 'safe haven' and it has attracted a lot of foreign buyers. These international purchases have tended to come from affluent people from the likes of the Middle East, India, China and Russia."
"When the world is in a state of crisis, investors always look for gold – so property investors always look for gold-style property. This has led to a boom in the price of prime London property, which has had a knock-on effect across the capital, leading to the price ripples moving out towards the M25,"
The ripple effect that Oliver alludes to is that buyers who would have previously looked at Chelsea or Kensington are now being forced further afield, causing the prices of homes in the likes of Clapham, Battersea and Fulham to increase, and so on.
Andrew Gibson, head of research at Galvan Research and Trading, says that it is not all bad news.
"London remains the star of the show and should be considered a distinct market altogether. There is an abundance of evidence indicating that foreign buyers have been the major driver of the capital’s outperformance," he commented.
"London is perceived as a property safe-haven for a number of reasons. It is western Europe’s largest city. It is cosmopolitan – just about every country and culture has a presence. And it is a deep and liquid market, so can absorb large sums without attracting much attention.”
"The rest of the UK can’t offer all of these qualities."
"It also helps that the taxes are lower and the paperwork more lenient – ask no questions, hear no lies – in London than in competing cities like New York, Paris or Berlin."
"And in the last five years, the pound’s weakness has made London property a lot cheaper for foreign buyers."
"There’s already speculation in the press that the Bank of England governor, Mark Carney, will seek to weaken the pound by as much as 15 per cent to cement the UK’s economic recovery. That’s likely to attract even more foreign investment."
A new dynamic has been added to the UK property market in the form of Help to Buy.
Under the new legislation, the Government will guarantee up to 20 per cent of a mortgage so that buyers who would not otherwise be able to afford the initial deposit can get a foot on the housing ladder.
Tony Yousefian, manager of the OPM Property fund, which focuses on commercial property, says that it is schemes like Help to Buy that are the catalysts for a potential house price bubble.
"One of the biggest problems of the UK property market over the past 15 years has been the massive difference in the supply/demand dynamic. The foreign buyer and interest rate argument is one of a number of factors that affect London property at the moment," he said.
"The much more fundamental influence is that the UK is a very small island whose supply-demand dynamic has, unfortunately, massively been in favour of demand."
"Previous governments have all tried to make the housing market more accessible, but every time they have tried they have effectively been adding artificial interference. Instead, they should have tried to let the supply/demand dynamic reach its own level."
"We had it with the previous Labour government, which tried to encourage people to buy. But one of the reasons demand outstripped supply was because planning was restricted. For the property market to fall sufficiently so that first-time buyers can get on the ladder, planning regulations need to be liberalised."
Yousefian (pictured) says that the current government should allow the divergence of supply and demand to sort itself out.
"When they will provide 20 per cent of equity for a first-time buyer and the buyer only has to put down 5 per cent of the deposit, they are not sensitive to the actual price. This will just keep pushing prices up."
Yousefian says the Government’s intervention is not the only factor inflating a bubble in the UK residential property market, and points to low interest rates and foreign buyers as other drivers.
He says it is understandable that foreign buyers flock to London over the likes of Norwich, Leeds or Bradford, as it is one of the most fashionable cities in the world. He also says the fact that sterling has weakened makes property a very attractive investment for foreign buyers at the moment.
Yousefian’s passing thought is not one of optimism.
"If and when interest rates rise, people need to be extremely careful, plus international buyers are causing a ripple effect out of London by pushing up prices," he said.
"But my final thought on this is that there will be a bubble in residential property that, at some stage, will burst. People used to believe that house prices could just keep going up, and they did, until the last bubble burst."
"Unfortunately, as sure as anything, it will all happen again."
