House prices in the United Kingdom are astronomically high, especially so in England’s capital city. The root cause of this housing boom aren’t as widely known as they should be. When asked, most UK residents will quote laws of supply and demand as being behind the surge and whilst this may be true in part, unlike other asset classes this paradigm is by no means the only factor at work.

So, what else has contributed to it?

1. Endless Credit from the Banks

In this particular equation, the world’s banks have to take a fair proportion of the blame, not just for astronomically priced properties, but also for the elements that led to the financial crash of 2008. Up until what was the biggest global financial crash since the 1930s, banks had been giving out vast amounts of credit to people, some of whom weren’t even in a position to repay the loans.

As the British house buying public had access to huge amounts of credit for mortgages, this had a accelerating effect on the housing market. In the years in between 1996 and 2008, property values in the United Kingdom literally tripled, only being checked when the financial world went into meltdown shortly after. When you consider that during the same period, lending more than quadrupled, it’s not hard to see how things happened the way they did.

What was seen in the rest of the UK was even more pronounced in London, seeing house prices rocket to levels not seen before and effectively pricing many people out of living in the area.

2. Historically Low Interest Rates

Another factor that has had a big effect on house prices in the UK is the Bank of England’s base rate of interest, which governs how much borrowers have to pay back in interest over the course of their mortgages. The same thing that had people posting their keys through the letter box and walking away in the 1980s when interest rates hit 15%, has allowed homeowners to enjoy the lowest mortgage repayments in recorded history.

The knock on effect of this is that when low interest rates are combined with banks giving out huge mortgages to almost anyone who asked, house prices are going to naturally rise. As the amount of potential buyers was at an all time high, the demand was too and this added further fuel to an already meteoric housing market.

3. Disposable Income

What this ‘perfect storm’ scenario did to the housing market was pronounced and obvious to the watching world, but what it did to the amount of money the average homeowner’s disposable income was equally marked in quite a short space of time.

Back in 1996, UK homeowners were, on average, spending just under 18% of their net monthly income on repaying their mortgage, whilst in London it was still a relatively modest 22% being spent. This is stark contrast to the situation just 12 years later, when the UK average had shot up to almost 50% and an eye watering 67% in London.

4. Exclusivity of London

What seems to be the overriding reason for house values in London is the fact that people want to live there, due to the transport links, the job opportunities and a host of other reasons that make London one of the most popular tourist destinations in the world. Nowhere else in the country is so much top class entertainment (the West End), fine dining, museums and nightlife within such easy reach. Of course, there are other cities that come close, but for sheer exclusivity, a world class city, there’s no place like London and people know that, which is what makes it so popular.

5. Construction Initiatives

This restrictive scenario has given rise to major construction companies like Surrendinvest and Galliard Developments offering special incentives to allow first time buyers to get onto the housing ladder in their newly built sites. This can take the form of either a deposit contribution, a reduced purchase price or a even a year of no mortgage payments on offer from this sort of developer.

This is only part of the problem for many trying to buy and live in the London area and whilst price rises continue to outstrip earnings, there will continue to be both winners and losers in the property market. It is a start though and it does offer an avenue for first time buyers and buy to let investors to get on the ladder.

Will it Ever Change?

Without a way to see into the future, you can never say never, but until wages catch up with inflation, the trend is likely to continue for some time to come. However, with property developers becoming inventive to appeal to a wider section of society, there may be an occasion soon when moving to the capital becomes viable for more people.

Right now though, central London remains one of the most expensive places in Europe, with the suburbs not that far behind.

Mark Homer
Mark Homer

Co-founder at Progressive Property, 600 + properties bought & sold. Full time property investor/analyst/geek & World Record Holder Author of No.1 Amazon best-selling book Uncommon Sense, Low Cost High Life and Commercial Property Conversions.