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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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How Theresa May laid a trap for herself on the immigration target

When Home Secretary, she insisted on keeping foreign students in the figures – causing a headache for herself today.

When Home Secretary, Theresa May insisted that foreign students should continue to be counted in the overall immigration figures. Some cabinet colleagues, including then Business Secretary Vince Cable and Chancellor George Osborne wanted to reverse this. It was economically illiterate. Current ministers, like the Foreign Secretary Boris Johnson, Chancellor Philip Hammond and Home Secretary Amber Rudd, also want foreign students exempted from the total.

David Cameron’s government aimed to cut immigration figures – including overseas students in that aim meant trying to limit one of the UK’s crucial financial resources. They are worth £25bn to the UK economy, and their fees make up 14 per cent of total university income. And the impact is not just financial – welcoming foreign students is diplomatically and culturally key to Britain’s reputation and its relationship with the rest of the world too. Even more important now Brexit is on its way.

But they stayed in the figures – a situation that, along with counterproductive visa restrictions also introduced by May’s old department, put a lot of foreign students off studying here. For example, there has been a 44 per cent decrease in the number of Indian students coming to Britain to study in the last five years.

Now May’s stubbornness on the migration figures appears to have caught up with her. The Times has revealed that the Prime Minister is ready to “soften her longstanding opposition to taking foreign students out of immigration totals”. It reports that she will offer to change the way the numbers are calculated.

Why the u-turn? No 10 says the concession is to ensure the Higher and Research Bill, key university legislation, can pass due to a Lords amendment urging the government not to count students as “long-term migrants” for “public policy purposes”.

But it will also be a factor in May’s manifesto pledge (and continuation of Cameron’s promise) to cut immigration to the “tens of thousands”. Until today, ministers had been unclear about whether this would be in the manifesto.

Now her u-turn on student figures is being seized upon by opposition parties as “massaging” the migration figures to meet her target. An accusation for which May only has herself, and her steadfast politicising of immigration, to blame.

Anoosh Chakelian is senior writer at the New Statesman.

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