The Economist explains: Why London’s house prices are soaring

Posted: May 15, 2014 in economy
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WHEN in 2008 Britain’s long-bubbly housing market slumped, few expected a quick rebound. After the last major house-price crash, in 1989, it took almost a decade for prices to recover to their previous heights, even in nominal terms. This time around, they have managed it in about half that time. In London, prices are already 25% above their 2008 peak, and now rising at a rate of about 18% a year. The average home in the capital costs more than £450,000 ($760,000); in some neighbourhoods the average house price is more than ten times the average income. What explains this dramatic recovery?One cause is financial. Prices entered a downward spiral during the recession, as banks gave out less generous mortgages, which meant that only people with substantial cash deposits could get together the money to buy a house. Since then, partly thanks to government subsidies, 95% loan-to-value mortgages (for which the buyer needs a deposit worth only 5% the value of the house) have reappeared. The number of new mortgages approved for house purchases has increased by about one-half in the past year. Meanwhile, thanks to the policies of the Bank of England, interest rates are low, meaning people can afford to borrow large amounts. Yet cheap money is back all over Britain, and prices have not risen equally. In London and the more affluent parts of the south east, they are …

via Economic Crisis


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