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An economic perspective on house prices in London: analysing some big questions

By Joel Marsden, Economist

The market for home ownership, house prices and mortgage costs in London are all topics which excite much opinion, and have inspired many blog posts. The latest GLA Economics working paper attempts to cut through the myriad views to focus on the economic fundamentals – looking at how house prices are set, how they are measured, how these prices relate to incomes, earnings and rents, and why the cost of housing matters for London’s economy and its residents. Setting aside the anecdotes, this GLAE working paper seeks to investigate the evidence on 5 big questions:
1. House prices and private rents are high across central London – but are incomes and earnings keeping pace?



Sources: Land Registry price paid data, 2014 and VOA private rents, 2013/14.
2. House prices are volatile and subject to cyclical corrections – but are economic fundamentals driving the recent upsurge in London house prices?

nominal and real house price levels

Source: ONS house price index, 1969-2014.
3. As house prices have increased so has the value of the average deposit – are first-time buyers able to meet these higher upfront costs?

deposit to income ratio

Source: GLA calculations based on CML annual data for first-time buyers, 1980-2014.

4. Historically low interest rates have held down the monthly costs of Londoner’s mortgage repayments – but what are the risks from future changes in mortgage interest rates?

impact of higher mortgage rates

Source: GLA calculations based on Council of Mortgage Lenders quarterly data, Q1 1980 – Q2 2015.
5. London is seen as an increasingly attractive place to live – but is the supply of housing primed to respond to the demands of a growing population?

new house building and real house prices

Sources: DCLG house building statistics and ONS house price index, 1990-2014

For more detailed analysis of these 5 questions and more, download a copy of GLA Economics Working Paper 72: House prices in London – an economic analysis of London’s housing market

The underlying data, figures and full source notes can be found on the London Datastore.