SIMON LAMBERT: It's not different this time - London's house price bubble will burst

In demand: London asking prices and rents are at astronomically high levels - and people are paying them.

As bubbles ripe for popping go, London's property market is up there with the best.

Many of our readers well versed in scoffing at Rightmove’s asking price-based figures, will probably have dismissed its report of prices up 10 per cent in just one month.



'You can ask what you want, you won't get it,’ their argument usually runs.



But, as your correspondent embedded in run-of-the-mill North London, I can assure you that astonishingly people are.



Over the past year the bandwagon has been picking up steam.



The grapevine delivers a steady drip of news of wildly optimistic estate agent valuations, turning into properties put up for sale, and then near-asking price offers accepted.



I know of two-bedroom flats put up for sale at £500,000 and then under offer near that within a week, and three-bedroom homes going to sealed bids of £700k-plus.

Buyers are falling over themselves for any property that has had some love and attention – especially if it can lay claim to a 30 foot garden.



And I live in an area judged to be relatively cheap.

So what on earth is going on?

My first observation is that what is missing from much analysis of London’s balmy house prices is a discussion about rents.



Property values may be astronomical by comparison with average earnings, but a mortgage looks good value in relation to renting in many of the bits of London where normal people live.



Renting that £500,000 flat could cost you more than £2,000 a month. Take a two-year fix and someone buying it with a £400,000 mortgage can get a rate of just 2.39 per cent and pay a shade under £1,800 a month.



This presumes, of course, that our theoretical buyer can raise a huge £100,000 deposit and has the income to support a £400,000 mortgage.



You might question how many people can do that, as I have myself on many occasions.



The answer is that there are a surprising amount of people in London who can - largely thanks the Bank of Mum and Dad, bonuses and high dual incomes.



Rising: Asking prices were up 10 per cent in a month, Rightmove shows, click to see the whole England and Wales map.

Another factor that comes into play is demand.



As a result of the financial crisis and recession, our already imbalanced economy is now even more skewed towards London.



The pressure on the capital from those hunting better prospects is perhaps greater than it ever has been before.



And it’s not just the UK that those hopefuls are sucked in from. Young and mobile Italians, Spanish, French and others from within the EU are also drawn to London, joined by many others from many other places around the world.



That makes London one of the world’s great international cities, a vibrant fun and energising place to work and live, but it also heaps colossal amounts of demand pressure onto rents and property prices.



Season all this with London property’s current status as a safe haven for the wealth of the world’s wealthy and super-rich and you have a recipe for trouble.



What is deeply concerning is that all this has happened before a single penny of Help to Buy 2 cash has crossed an estate agent’s palm.



I can’t see the imminent arrival of taxpayer subsidised small deposit mortgages doing anything but driving London house prices even higher.



Where this all ends I don’t know.



Some argue for more building to create supply, but I think London’s real problem may be far too much demand and curing our national economic imbalance would be a better plan. I also suspect a building spree would simply bring in more people to do the work, overheat the London economy even further and possibly make things worse.



Among all of this, there are plenty of people willing to argue that London is special and thus different rules apply, that old-fashioned measures of valuing property against income no longer apply and we should just embrace the whole thing.



Yet take a step back and it’s not hard to see that things have gone bonkers even by the usual standards of London’s over-inflated house prices and rents.



It’s easy to shrug this off as just crazy London prices, but when this all goes wrong the ripple effect could seriously damage the whole British economy.

