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London house price boom could 'unravel', warns Deutsche Bank



Investment bank warns of threat posed to UK economy by an overheating housing market, the end of cheap money and a rise in interest rates


London house price boom could  'unravel', warns Deutsche Bank
London house price boom could 'unravel', warns Deutsche Bank

Excluding London and the South East, the UK average house price rose 3.8pc to £196,000. Photo: PA


By  John Ficenec


London house prices could "unravel" in the face of a toxic mix of a strengthening pound and the Bank of England rushing through interest rate rises from next year, Europe's largest investment bank has warned.

Deutsche Bank has brought forward its expectations for the Bank to increase interest rates starting from May 2015 - raising concern among mortgage holders already struggling to service their debt.

The German lender expects rates to increase to 1pc by the end of next year, in a research note titled "Strong growth not built to last".

Coupled with the end of "easy money" on global capital markets as central banks rein in loose monetary policies, Britain's housing market could come crashing back to earth as the influx of foreign buyers dries up.

UK property prices have been supported in high value areas such as London from a surge in Russian, Chinese and Middle East buyers seeking an investment safe haven.

Property prices in the nationís capital have rapidly outpaced the rest of the country. From lows in 2009, house prices in London have soared by almost 50pc since the economic crisis, and are now 20pc above their pre-crisis peak, according to Deutsche Bank research.

House prices in the rest of the UK have generally struggled to recover post-crisis as wages have remained stagnant. Property prices in the regions remain exposed to even small increases in the Bank Rate that could rapidly make mortgage payments unaffordable.

Household finances remain stretched and exposed to any increase in the cost of mortgage finance. A toxic combination of rising interest rates, a strengthening of the pound and further austerity could all result in the long run average of growth slowing to 2pc as soon as next year, say economists from Deutsche.

The Bank of Englandís Financial Policy Committee said it would ďremain vigilant to emerging vulnerabilitiesĒ related to the recovery in Britainís housing market and would "take further proportionate and graduated action if warranted."

The Federal Reserve also has been tightening its monetary policy by reducing the amount of bonds it buys by $20bn to $65bn a month. The US central bank has also said it could raise interest rates from near-zero to 1pc next year and 2.25pc the year after.

The reduction of US easy money has seen the value of Chinese currency fall, which could see cash rich buyers pull back from investments abroad. This could have a knock on effect for London house prices as off-plan new development flats have proven wildly popular with Asian buyers.

According to figures from Nationwide on Wednesday, London house prices are now 100pc more than those elsewhere in Britain, with the difference in price between the average home in and outside London now £183,000.


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