North-South divide may narrow but not for long

London and South-East already seeing a cooling in property market

Every few years, when house prices are rising rapidly in London, attention focuses on the widening gap between the cost of property in the north and south. It is pointed out, often with a certain amount of metropolitan satisfaction, that for the price of a standard terraced house in London, it is possible to buy a row of terraced houses in the North or a small Scottish estate. Stories of minuscule studio flats in Kensington selling for twice the national average house price usually make their entry into the newspapers at this time.

A frenzy of media concern about regional equity tends to reach a peak after two or three years of rising prices in London, then when house price inflation levels off in London and the South-east it tends to go quiet.

In fact, regional house prices, and regional house price inflation show a distinct and repetitive long-term cyclical pattern. There are two main aspects to this. The first concerns national house prices and the link between house prices and incomes. Since 1970 Britain has experienced four distinct house price booms, interspersed with periods of stability and, in the first half of the 1990s, a sharp slump.

The existence of this cycle of boom and stability is relatively well known. The first boom was from 1971-73, when average UK prices rose by 33 per cent and 36 per cent respectively in 1971-72 and 1972-73. It came to an abrupt halt in late 1973 when, in the face of rising inflation, the Bank of England raised interest rates by 5 percentage points in one go. In the three years national average prices doubled from £4,900 to £9,900. This seems almost a golden age of low house prices in retrospect, but incomes were much lower.

The second boom was in 1977-1980 when prices rose respectively by 16, 29 and 21 per cent. Average prices again almost doubled from £12,600 in 1977 to £22,000 in 1980. The third boom was from 1983-89 when prices more than doubled from £25,000 to £62,000. Council for Mortgage Lenders data suggests that national average house prices remained stable during the 1990-95 slump but the Land Registry data shows a sharp decline and in London and the South-east prices fell sharply. The most recent boom, from 1996-2001, has seen national average prices rise from £62,000 to more than £100,000.

But these figures are national averages and they conceal marked regional differences. The key point to bear in mind is that house price booms always start first in London and the South-east. Booms also peter out first in London and the South-east, often quite sharply. The reason for this is simply that London has the greatest concentration of high incomes in Britain, and rising incomes and demand drive house prices.

Generally speaking, prices in the more peripheral regions of Britain increase more slowly, and lag increases in the South-east. As a result, in the first couple of years of a house price boom, prices in London and the South-east gallop ahead and this is when a London house can buy half a dozen terraced houses in the North. At this stage of the cycle, the regional house price gap is greatest. The bottom chart, which shows regional house prices as a percentage of London's, shows this was the case in 1972, 1979, 1989 and 2000.

This is when the media begin to lose interest in the story. But what then happens is that while prices in London and the South-east slow abruptly, prices in the Midlands the North and other regions often go on slowly rising for several years. This happened in the mid 1970s, the early 1980s and the first half of the 1990s.

The result of this process is simple. The size of the regional house price gap widens in the early years of a boom as London and the South-east pull ahead, then narrows as prices cool in London but keep rising in the rest of the country. Council for Mortgage Lenders data shows the gap continued to grow in 2001, but recent data from Halifax and Nationwide suggests price inflation in the South-east has slowed while prices have risen sharply elsewhere. My assessment is that the regional house price gap peaked in 2001 and is now narrowing.

The worrying question is whether the long-term gap is widening. The top chart shows average house prices in London reached 140 per cent of the UK average in 1972, but 160 per cent in 1987-88 and 165 per cent in 2000. Although they fell back to 120 per cent of the UK average in the past, it may be that in the early years of the new millennium, average house prices in London will stay at 130 to 140 per cent of the UK average even at the bottom of the cycle.

That would indicate London and the South-east is pulling away from the rest of the country as a result of higher income growth, inward migration and supply shortages. The bottom chart suggests this began to happen from the mid 1980s. There may therefore be a long-term trend for prices in London and the South-east to rise faster than in the rest of Britain, overlain by a seven to 10 year regional house price cycle.

But please, no more stories about buying whole streets in the North and small estates in Scotland. This is old news. Prices have already risen sharply in East Anglia, the South-west and elsewhere. Londoners wanting to sell up and buy a country estate have missed the boat this time around and will have to wait for the next boom. I suggest about 2006-07 should do it nicely.

Chris Hamnett is Professor of Geography at King's College, London.