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Bill Jamieson: London leaving UK out in the cold

Economic comparisons between Scotland and London are becoming increasingly meaningless, writes Bill Jamieson. Picture: Jane Barlow

Economic comparisons between Scotland and London are becoming increasingly meaningless, writes Bill Jamieson. Picture: Jane Barlow

IT IS, we are told, the prime function of central bankers to take away the punch bowl when the party gets going.

Nowhere is this function now more urgently required than in coverage of so-called “booming” or “surging” house prices.

It’s one of the most favoured measures of our national wellbeing – assuming, of course, you’re a home owner and not a first-time buyer struggling to get on the ladder.

Strongly rising prices boost the self-esteem of home owners and help to lift household confidence. They also increase the amount which owners can potentially increase their mortgage borrowing and spending. And such news is never more potent than as now with spring-time and the approach to Easter when house purchase reaches a seasonal peak.

Last Friday the headlines told of house price inflation surging again. According to latest figures from the Halifax, the UK’s biggest mortgage lender, house prices across the UK rose by 8.7 per cent in the year to March, the highest inflation rate since October 2007. In the first quarter of 2014 prices rose by 2.3 per cent, compared to the last quarter of 2013.

It put the increase down to an improving economy, growth in employment, rising consumer confidence and low interest rates.

Earlier last week the Nationwide Building Society reported that, according to its calculations, house prices are rising at an annual rate of 9.5 per cent.

Good news, then? Well, no. First, these are national average figures. And these averages can be very misleading of the true picture in many areas – Scotland in particular.

Further, a closer look at the figures shows that, measured on a monthly basis, prices fell by 1.1 per cent in March, compared with February. Along with similar evidence from the Nationwide, and the dip in mortgage approvals reported by the Bank of England, the figures suggest that the rate of house price growth has recently slowed.

But the greatest distortion of all, and one that casts a major shadow on the credibility of these numbers for millions of people, is that they are being driven in large measure by a continuing price surge in central London. A tiny niche market is wagging a very big dog.

While house prices have surged in London and the south-east to above their pre-crisis peaks, the same is not true for most other parts of the UK, including Scotland. According to analysis by Hometrack, some 78 per cent of markets in the UK remain below peak levels, with 41 per cent still 10 per cent or more below their peak.

London’s property market now seems to be on a different planet to the rest of us – but we allow these numbers to distort the UK “average” picture. In the prime market (houses valued at £400,000 and over), estate agent Savills recently reported that London prices have risen by 30.6 per cent since the peak in 2007. The rest of the south of England has recorded a fall of 12.9 per cent. In the Midlands and the north of England, average prices are down by 16.9 per cent from the peak. In Scotland prices are down by 23 per cent.

The gap between prices in London and the rest of the UK is now the widest it has ever been. The difference is now approaching £200,000, the greatest gap since data was first collected in the late 1970s.

For the mega rich in Asia, Russia, the troubled Club Med economies and the Arab world, London has offered the double pull of being a highly attractive and sophisticated place to live with the lure of “safe haven” status, helped along by a strong currency.

Previously, home buyers in Scotland were able to draw a modicum of comfort from London’s extraordinary behaviour, confident that, in time, there would be an outward ripple effect.

But the dynamics of the central London market are now so different, and recent behaviour so extreme, as to suggest that this ripple effect no longer works in the way that it once did. Indeed, for the mainstream market over the next five years Savills is forecasting gains of 31.9 per cent in the south-east of England, 30.7 per cent in the east of England, 24.4 per cent in London – and 19.3 per cent in Scotland. In other words, the gap grows wider – not just between Scotland and London but between most other areas of the UK.

For the prime market it is forecasting rises of 23 per cent, both for the London area and across the English regions. For Scotland it is forecasting 18 per cent.

Central London looks increasingly overdue a sharp correction. Extra taxes are in store for this market niche. Until now, non-resident owners have been exempt from capital gains tax. But under the new system, which kicks in next April, this exemption will end, making London property less attractive than property in the likes of France. And last week Deutsche Bank issued a warning that the surging property market is in danger of “unravelling” due to the combination of a strengthening pound and the prospect of rising interest rates. It now expects the Bank of England to start raising rates by May next year.

The pain would not be felt much by mega-rich central London buyers, who of course have little need for mortgages. It’s the broad market that will suffer. “Even small moves higher in bank rates could mean a rapid deterioration in affordability”, Deutsche Bank warned.

Meanwhile, comparisons between Scotland and London have now become so grotesque as to be meaningless. It is not Scotland but London that is becoming more detached from the UK. Comparing “Scotland” with “London” is truly to compare apples and pears. You could now buy more than 20 houses in Scotland for the average price of a London Belgravia property. Recent individual transactions have included a house in Knightsbridge for £18 million. You could buy “the full works” Scottish estate with grand mansion, gardens and shooting rights for just £2.5m.

Even by the excesses of the London market, this is absurdity – but a telling reminder of the gulf that now separates the centre of the UK’s capital city from the rest. Beware of “average” movements driven by this small unrepresentative sample.

 

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