London prices soar 10pc in October

Buying frenzy prompts warning from Bank of England that market may be overextended

PUBLISHED : Wednesday, 23 October, 2013, 4:49am
UPDATED : Wednesday, 23 October, 2013, 4:49am

London house prices have surged by more than 10 per cent this month, prompting warnings from the Bank of England that it was on the alert for signs that borrowers may be overextending themselves.

The sharp jump in prices was driven by demand from overseas investors, adding pressure to a market with an already small supply of properties, according to property website Rightmove.

Values in the British capital city surged 10.2 per cent, or £50,484 (HK$631,000) to an average of £544,232, Rightmove reported.

Estate agents in inner London reported a "buying frenzy" that reduced the available stock to nearly nothing, it said. The rise - the biggest monthly jump since 2002 - took annual price growth to 13.8 per cent, more than five times the rate of inflation.

The news prompted Bank of England (BOE) official Martin Taylor to caution that policymakers were watching for signs that banks or borrowers may become over-extended as the housing market strengthens.

The central bank's Financial Policy Committee was also monitoring for "signs that borrowers were not in a position to withstand an eventual rise in interest rates, signs in general that a more speculative market might be developing", he said in a speech on Monday. "Housing boom and bust and financial stability make uneasy bedfellows," he warned.

Commenting on the latest sales data, Miles Shipside, Rightmove director and housing-market analyst, said London was "a world city where overseas investors see real estate as a safe asset at a time when safe assets are increasingly scarce".

The surge in prices partly reflected buyers returning to the market after the summer slowdown, he added.

But while the increase in London values this month followed declines of 2.8 per cent and 1.5 per cent in the previous two months, Rightmove said such a gain is unsustainable.

In comparison, there was no risk of a property bubble outside of London, it added. House prices in England and Wales, excluding London, rose an average 1.4 per cent this month from last month and were up 0.2 per cent from a year earlier.

In two of the 10 regions tracked by Rightmove, prices fell this month from September, while five recorded year-on-year declines, it said.

Demand for property has been boosted by a government programme to help Britons buy a home with a deposit of as little as 5 per cent. At the same time, the BOE has said it won't consider raising its benchmark interest rate from a record-low 0.5 per cent at least until unemployment falls to 7 per cent from 7.7 per cent currently.

BOE officials have said mortgage borrowers should ensure they can still afford repayments when borrowing costs rise.