* Government lending incentives may prove hard to end
* Gap between London and rest of country at record high
* Bank of England faces tricky balancing act
By Christina Fincher
LONDON, Aug 4 Tony Richmount is thankful he
A year ago, the retired engineer from Wimbledon wanted to
sell his house and move to a retirement flat but got cold feet.
That proved to be a stroke of luck. His three-bedroom house,
valued at 600,000 pounds last summer, has just sold for 725,000
pound ($1.1 million).
Property appreciation of 20 percent in a year is far from
unique in parts of London like the leafy south-west
neighbourhood known best for its tennis tournament.
Record-low interest rates and generous - some say fiscally
dangerous - government incentives to get banks lending have
lifted mortgage affordability to its highest in generations.
It has prompted talk of housing "bubbles" and questions
about whether billions of pounds in stimulus for the economy is
going to the right place.
Britons, many of whom who need little encouragement when it
comes to borrowing, are making the most of it, leveraging up
like they did before the credit crisis and helping drag the
economy out of its post-recession doldrums.
Property prices are rising at their fastest pace in three
years, according to Nationwide, a building society. In London,
the best-performing region, prices are already 5 percent above
their 2007 peak.
Critics accuse the government of pumping up the market to
restore a feel-good factor ahead of national elections in 2015.
A recovery driven by credit, they say, is unsustainable and will
build problems for the future when interest rates rise.
For aspiring British homeowners, however, the lure is
strong. The Bank of England has given a strong hint it might not
raise rates before 2016 and the government is adamant its "Help
to Buy" scheme will run for three years, rising prices or not.
In the capital, cheap mortgages are changing the drivers of
the market. Big price gains used to be for trophy homes snapped
up for cash by super-rich foreign buyers. Now the bidding wars
are breaking out in the suburbs.
Sean Purtill, managing director of Wimbledon estate agent
Ellisons, says buyer interest has exploded in the last three
months. In South Park Gardens, a desirable pocket of tree-lined
roads near a park and good school, prices have risen 24 percent
in a year. In the "Apostles", a grid of Edwardian family homes,
prices are up 23 percent.
"Just last week we had a meeting of our branch managers and
everyone kept saying how incredible this market is," he said.
"When a house comes on our books we will typically hold an
open day on a Saturday, have 15 to 20 people look round it and
by Monday we'll have five bids, mostly at the asking price."
Sealed bids, not seen since the frothy days of 2007, are
making a comeback and homes in popular areas can draw two or
three offers above the asking price.
To make sure prospective buyers are serious, Ellisons
require successful bidders to engage a lawyer within 48 hours
and book a property survey within three weeks. Delays, Purtill
explains, scupper deals: Sellers see a neighbour's house come on
the market at a higher price and wonder if they should re-market
their property for more.
A scarcity of land for development and a concentration of
high earners has turbo-charged price growth in the capital.
Fewer than 12,000 homes a year have been built in Greater
London in the last decade, a fraction of the 30,000 or more that
experts say are needed just to keep pace with demographic
Where London leads, the rest of the country tends to follow,
but the gap between the capital and less affluent regions is
growing. House price growth nationally has picked up to around 4
percent a year but in parts of northern England prices are flat
In Liverpool, an industrial city in the north-west, the
council has launched a project to auction derelict properties
for as little as a pound. In the seaside town of Blackpool a
little further north, two-bedroom properties can still be bought
for 50,000 pounds, a 10th of the cost of an average house in the
The government touted "Help to Buy" as a scheme to help
people onto the property ladder who would otherwise lack the
means to do so, but its biggest impact appears to have been to
drive up prices in more affluent areas by making the housing
market seem a one-way bet. Indeed, the properties selling
fastest are often above the scheme's 600,000 pound price limit.
Ben Cameron, a sales negotiator at Andrew Scott Robinson, an
estate agent that focuses on South-West London and further out
Surrey, reckons the sweet spot is between 600,000 to 1.2 million
A house in this bracket, particularly if near a good school
and transport links, will often sell in just one or two weeks.
Nationally, the average time a property spends on the market is
"Buyers are coming out of rented accommodation because they
are seeing prices rise. They may have missed out of previous
house price rallies and want to jump on this one," he said.
"Help to Buy" is not the only way the government is
subsidising the housing industry. The "Funding for Lending
Scheme" launched via the Bank of England a year ago has helped
lower mortgage costs and increase the availability of loans.
Before the scheme was introduced last summer, the lowest
five-year fixed mortgage rates were close to 4 percent. Now
rates can be as low as 2.49, below the rate of inflation.
Between 2009 and 2012, the recovery was driven by overseas
cash buyers looking to shelter their wealth from instability in
the euro area and from political change sweeping through North
Africa and the Middle East.
Most demand now, says estate agent Knight Frank's head of
residential research Liam Bailey, is from Britons buying with a
There are signs that the recovery in the housing market is
fuelling a recovery in the broader economy.
Rising prices typically go hand-in-hand with rising consumer
spending, and the government's "Help to Buy" scheme has given
property developers the confidence to build again. The
construction sector grew last month at its fastest pace in three
years, with the residential sector the best performer.
Supply, however, is still not keeping pace with rising
The International Monetary Fund, former Bank of England
policymakers and Britain's official budget watchdog have all
warned that state-backed mortgage guarantees, the main plank of
"Help to Buy", will only push prices higher, putting property
further out of the reach of first-time buyers.
Concern has even been voiced from within the government's
"I did warn about it, and I am worried about the danger of
getting into another housing bubble," business minister Vince
Mortgage payments as a percentage of average income look
sustainable, but this will only hold for as long as interest
rates remain at abnormally low levels. Affordability on
traditional price/earnings metrics is already looking stretched.
The Bank of England faces a dilemma. If it tightens policy
prematurely to put a break on property prices it could snuff out
the recovery. If it leaves rates at record lows, homeowners will
load up on more debt and be in more trouble when rates
A Bank of England report in May warned that nearly one in 10
people with a mortgage would have to take significant action -
such as working longer hours or cutting back on spending - if
rates were to rise by just one percentage point.
While policymakers deliberate, those stepping off the
property ladder are rubbing their hands. Tony Richmount is
looking forward to a more comfortable retirement, and the
opportunity to indulge his grandchildren too.
"My son, who works in finance, told me I was making a
mistake when I didn't sell last year," he said. "I'm glad I