But even allowing for the distorting effect of London, the housing market is buoyant generally. The question for the policymakers is at what point the market goes from buoyancy to boom for the next phase in the cycle is invariably bust.
The evidence is beginning to accumulate worryingly. Mortgage lending is running at the highest level on record and the latest Halifax survey calculates that house prices are rising nationally at 8 per cent. That is twice the rate at which earnings are growing and far faster than any analysts had predicted.
There are also the first incipient signs of reckless lending. The Northern Rock and one or two other lenders are offering mortgages of up to 125 per cent, presumably on the assumption that house prices are a one-way bet. The last time the building societies resorted to this was to allow homeowners caught in the negative equity trap to sell their houses and move on. But this time around the mortgage lenders are in danger of creating a new army of homeowners caught in negative equity if their bet on house prices goes wrong.
By offering 100 per cent plus mortgages, the building societies are also adding to the problem of equity withdrawal. The more homeowners exploit the value of their property to fund increased spending, the greater becomes the threat of inflationary.
The surge in house prices would be easier to contain if there was not such a shortgage of supply. Unlike other commodities, the housing stock cannot be added to quickly. Even though Professor Douglas McWilliams at the Centre for Economic and Business Research is forecastiong that the booming London economy will feed through to a 10 per cent rise in construction activity this year, property prices will stiil rise by 16 per cent this year and 10 per cent next.
Those who argue that the property market is not heading for boom and bust make two arguments. First, the surge in prices really is a London phenomenon and, not only that, it is restricted to parts of London where unemployment is lowest. David Hiller of Barclays Capital says that those London boroughs with ther highest unemployment levels are actually experiencing house price deflation.
The other argument is that, notwithstanding the rise in house prices, homes are more affordable now than ever before. The Council of Mortgage Lenders says that, adjusted for inflation, house prices have only just recovered to their 1988 levels while the Cheltenham and Gloucester Building Society's affordability index estimates that houses are 60 per cent more affordable than they were in 1990.
This is largely due to mortgage rates being at a 35-year low. As we all know, building societies do not take the level of interest rates into account when deciding how much to lend housebuyers.
The most tangible sign of a booming economy is runaway house price inflation. The Bank of England has been relatively sanguine on the issue up until now. But for how much longer?Reuse content