UK 19 May 2014 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? Welcome to the bubble. Photo: Getty Sign UpGet the New Statesman's Morning Call email. Sign-up 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. › How do you achieve the perfect sound? Build a fibreglass horn the length of a Routemaster, of course Jonn Elledge is a freelance journalist, formerly assistant editor of the New Statesman and editor of its sister site, CityMetric. You can find him on Twitter or Facebook. Subscribe For daily analysis & more political coverage from Westminster and beyond subscribe for just £1 per month!