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The Bank of England should consider imposing a formal limit on mortgage to income multiples to avert a possible risk of housing bubble in London, an Ernst & Young (EY) ITEM Club special report has advised the policy makers in the UK. 

While the housing sector in the rest of the UK is headed for healthy growth, London is beginning to show signs of ‘bubble like conditions’, the report prepared by a highly regarded group of economists has said. 

The prices of residential properties are escalating at an alarming rate amid an acute shortage of supply and strong demand in London. The average house price in London is expected to reach nearly £600,000 by 2018, over three times that in Northern Ireland and the North East, according to the report.

The international interest in the London’s housing sector has also contributed to rising prices. Affluent foreign investors are making a beeline to buy prime and high-end housing properties in London. The better returns on investment compared to other parts of the world and a weak pound are some of the factors attracting investors from all over the world.

The report advises the Bank of England’s Financial Policy Committee (FPC) to prevent people in London from borrowing more than three times their annual income as income multiples are now back to pre-financial crisis levels. Lenders in London have become very relaxed about income multiples and mortgages are usually more than three times the average salary. 

The report has good news for the housing sector in the rest of the UK. The report said that housing sector is riding on the back of various government support schemes, improved credit conditions, rising employment and an accelerating recovery in the wider economy. It seems to be in much better shape than before the financial crisis in 2008. The report forecasts that UK house prices will grow by 8.4% this year and 7.3% in 2015, before coming down to around 5.5% a year thereafter. Housing prices are expected to rise at an average rate of 6.5% annually over the next five years.

There will be increase in the housing transactions (over 1.36 million people are predicted to move home in 2018) due to the projected growth in the house prices in UK, which will boost the confidence of house owners and improve their spending power. House price rises will also have a positive impact on the economy as related industries and businesses stand to benefit, the report has concluded.

This article was republished with permission from Global Property Guide.