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Let’s just say it: London’s in a house price bubble

The city’s house prices have risen 18 per cent in a year. Can we stop pretending this is normal now please?

More unalloyed good news from the ever-sane London housing market: according to mortgage lender Nationwide, property prices in the capital have climbed 18 per cent over the last twelve months. Average prices are now 5.3 per cent up on the start of the year, 20 per cent above their pre-crisis peak, and more than twice their equivalent in the country as a whole.

This is obviously brilliant news for anyone who owns a home in London, has all the space that they could ever need, and whose long term ambition is to move almost anywhere else. Let's have three cheers for entirely rational exuberance. If you're a first time buyer, though, or a Londoner who hopes to have kids one day without moving to Worcestershire, then the news is rather less positive.

Actually, there’s another groups for whom any boom in the London housing market is fantastic news: investors. In recent years, London houses have become increasingly popular not just as a place to live in, but as a safe place to put your money. And whether the buyer is a Russian oligarch, or a moderately affluent buy-to-let investor, the logic is the same: whatever else may be going on in the world, whatever the broader economic conditions, London house prices can be relied on to increase.

Sentiments like that, though, have a historic tendency to be proved suddenly and catastrophically wrong. And there are a number of reasons to think the market might, one day, go into reverse.

One is that – despite how it may feel to those paying them – London rents are currently at an unusually low level compared to house prices. This, the FT's Tim Harford pointed out last week, suggests that either rents should soar – or prices should fall.

There’s another reason to suspect that the boom can't last forever:  interest rates can only move in one direction. When they inevitably climb, mortgages that are just about affordable now will suddenly be affordable no longer. Result: more repossessions, fewer new buyers entering the market – and, probably, a fall in prices.

The biggest reason for cynicism, though, is that the current nature of the housing market is likely to exaggerate any such fall. Prices are being driven at least partly by investors – and investors are timid beasts. The price of a home in the capital probably doesn’t need to dip much before everyone concludes that London property isn’t the rock solid investment that they thought it was, and people start to pull their money out before everyone else does. If that happens all bets are off.

That doesn't mean the market will change direction tomorrow. (It won’t.) Nor does it mean that London's housing shortage is entirely imaginary: whatever else is going on, there are clearly too many people chasing too few houses.

But as thing stand, prices are also being driven upwards by herd mentality and a bizarre assumption that they can only move one way. It's the logic of the bubble – and, eventually, bubbles burst.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Daniel Hannan. You can find him on Twitter or Facebook.

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Can Philip Hammond save the Conservatives from public anger at their DUP deal?

The Chancellor has the wriggle room to get close to the DUP's spending increase – but emotion matters more than facts in politics.

The magic money tree exists, and it is growing in Northern Ireland. That’s the attack line that Labour will throw at Theresa May in the wake of her £1bn deal with the DUP to keep her party in office.

It’s worth noting that while £1bn is a big deal in terms of Northern Ireland’s budget – just a touch under £10bn in 2016/17 – as far as the total expenditure of the British government goes, it’s peanuts.

The British government spent £778bn last year – we’re talking about spending an amount of money in Northern Ireland over the course of two years that the NHS loses in pen theft over the course of one in England. To match the increase in relative terms, you’d be looking at a £35bn increase in spending.

But, of course, political arguments are about gut instinct rather than actual numbers. The perception that the streets of Antrim are being paved by gold while the public realm in England, Scotland and Wales falls into disrepair is a real danger to the Conservatives.

But the good news for them is that last year Philip Hammond tweaked his targets to give himself greater headroom in case of a Brexit shock. Now the Tories have experienced a shock of a different kind – a Corbyn shock. That shock was partly due to the Labour leader’s good campaign and May’s bad campaign, but it was also powered by anger at cuts to schools and anger among NHS workers at Jeremy Hunt’s stewardship of the NHS. Conservative MPs have already made it clear to May that the party must not go to the country again while defending cuts to school spending.

Hammond can get to slightly under that £35bn and still stick to his targets. That will mean that the DUP still get to rave about their higher-than-average increase, while avoiding another election in which cuts to schools are front-and-centre. But whether that deprives Labour of their “cuts for you, but not for them” attack line is another question entirely. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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