London is the greatest city on earth. It is a dynamic, vibrant and diverse place, where dreams are made and the best of the best create and innovate. For many years now, our capital city has been spearheading our economy, providing nearly a quarter of Britain’s GDP and having an economy nearly the size of Sweden’s. However, take away the vast wealth and huge prosperity of London and you are left with a huge, overarching problem; housing. It dominates debates, leads to throwaway promises and soon will make or break a mayor’s premiership. London is in desperate need of affordable housing to help ease the burden of vastly expensive property that the average family could only ever dream of. London housing is in a huge mess, throwing families to the sides of society. It truly is the great British rip off.
In the mid-1990s, London house prices were around 50% greater than the UK average house price. After a large increase in house prices during the late 80s, there was an equally large fall in house prices in the early 90s. This decrease may seem daunting but it may have actually aided in an economic recovery later on. It took the air out of an ever increasing housing bubble, helping deflate a huge bubble that could explode at any moment. The large decrease in house prices enabled the Government to kick the issue into the long grass, not to be seen for a very long time. And as house prices fell by such a large margin, when the economy did bounce back, the Government could be assured that a bubble would not arise for a number of years. Despite large economic growth during the mid-1990s, housing prices wouldn’t reach 1989 levels until 1997. There were of course downsides to this housing crash, with large-scale repossessions and people seeing new-bought property rapidly decrease in value. However, out of the bust came the inevitable boom. And London was about to see a housing boom like never before.
As the millennium came to an end, there was an unnerving trend occurring. Instead of house prices decreasing, or even stagnating, they were soaring. In 1995, London house prices were around 2.5 times the average wage within the city. However, by the end of the decade, this figure had ballooned to over 4 times the average wage. As London house prices continued to grow, a new trend was born, and this trend would continue until 2008. Cheap credit was soon sloshing around and practically anyone with a bank account could secure a mortgage. There was many consequences of the huge house price inflation. House buyers took on huge levels of mortgage debt to help finance their new home. New home-owners become vulnerable to interest rate rises. And it was clear as day that the new housing bubble was completely unsustainable. However, no one complained. Consumers were happy, being able to finance their new dream homes. Banks were happy, with their balance sheets and profits booming. And the Government was happy, with stamp duty revenue helping lower the deficit. They would not be happy, however, when the bubble finally popped.
London’s housing bubble continued right up until the 2008 global crash. Housing prices very nearly trebled in a mere eight years, topping £300,000 by the start of 2008. London house prices were a staggering 7 times the average wage by the time the crash hit the city. And now a quarter of large mortgage debt was tied up in the capital city. By 2007, the London housing bubble had reached unsustainable proportions. Not only was house prices rocketing but affordable housing was plummeting, meaning that the London housing market was fast becoming the toy for the superrich. Then, in 2008, came the financial crash, ironically caused by too much credit going into the hands of homebuyers that should have never have been able to access it. The bubble may have received a prick, but it did not fully deflate. After a fall in house prices in late 2007, they were increasing again by early 2009. This small bust caused a fall of under 17% in London house prices, compared to a decrease of nearly 40% in the early 1990’s crash. House prices eventually bottomed out at £250,000, which was still the average price in 2004. The housing bubble had not been deflated, just stalled.
Nearly twenty years on from the start of London’s ultimate housing bubble and the city still faces various issues. The city doesn’t have nearly enough affordable housing, meaning that many new homebuyers are locked out the market and forced to rent. A large proportion of housing is being snapped up by foreign investors, resulting in property lying empty for months and not being effectively used. And many commentators claim we are on the verge of a new housing bubble, with prices still increasing at an incredible rate. The average London house price is 10 times larger than the average wage of a first time buyer. In the last six years foreign investors have purchased around £100 billion of London property. And the average London house price currently sits at a staggering £472,000, much higher than at the pinnacle of the last housing bubble. There has been, however, rumours of a small deflation in the huge bubble. With price only increasing marginally, some say current house prices are unsustainable and will crash when interest rates eventually rise. Time will only tell if this will crash will actually help deliver lower housing prices.
As London house prices continue to soar, it seems the city is in need of another housing crash. Despite many people feeling that the 2008 financial crash delivered one, this was only a mere setback, which set the city up nicely for yet another huge housing bubble. If our capital city experienced a 1990s style housing crash, it would allow for a much lower, natural bottom price that would actually be sustainable. Then, as prices began to rise once again, the implementation of proper regulations could help keep another housing bubble at bay. London homeowners may not want another housing crash, but it is fast looking like the only solution.