Is this the year to buy property in London?

Over the last few months alone, property news portals have been awash with stories of sharp price increases. The reasons have been typically wide reaching, ranging from a strengthening in the wider UK economy, to increases in first-time buyers hitting the market and even an influx of overseas investors perceiving British property investments as a safe option. Either way, values have been hitting the roof and some reports even claimed that, in London alone, prices have increased to the tune of £5,000+ in a matter of months.

Whilst everyone seems to be unanimous in their appraisal of property price increases, a disparity becomes apparent when looking ahead. Some argue that these most recent price increases indicate more buoyant times to come in the property market. Others, meanwhile, have claimed that these results are little more than evidence of a new, wholly unsustainable property price bubble in the capital that is ready to burst.

So which of the two is most likely to be right – and what does this mean for prospective investors?

The ‘bubble’ argument

Whilst few people would begrudge offering aspirational young people the chance to finally get themselves on the property ladder, some have argued that recent measures have impacted the market too much – causing monumental shifts that may end up being detrimental in the long term.

Schemes such as Help to Buy have opened up home ownership to those who may otherwise have struggled to scrape together the £20,000 or so that some banks were requiring. It proved to be very popular and has since been extended beyond its short trial run. Now, the government has pledged to keep the scheme going – with an investment of around £6 billion – until 2020.

What some critics have argued, though, is that the Help to Buy scheme did too much too quickly. It enabled a tsunami of prospective buyers to enter the market almost overnight, which was especially true in London. This even led some analysts (including Legal & General chief executive Nigel Wilson) to call for a revocation of Help to Buy for those in the capital, so it’s offered only to regional buyers instead.

The crux of the argument is that rapid price rises in London are unsustainable. Just as in Britain before the recession (and noted most prominently in other global destinations such as Dubai), sharp price rises bring about a scything decline when the market eventually drops. It is said that Britain is not on stable enough footing to maintain these price increases, so the bubble can only burst.

The counter argument

Despite the doom-mongering fears of those anticipating a crash, many others have noted how they expect quite the opposite: a safe and secure boom period that offers unrivalled investment opportunities.

A poll by Reuters, for example, found that 27 property analysts expected prices in the capital to rise by seven per cent during 2014. In forecasting such a rise, of course, these analysts have said – with a degree of confidence – that they are seeing no such crash on the horizon. This correlated with the growth figures for early 2014, which showed a year-on-year increase of 6.9 per cent.

For these, Help to Buy is most certainly a positive scheme, as it will drive prices upward but (most crucially) do so in a market with sufficient stability to handle it.

These individuals don’t just have optimism and the government on their side, though, but are supported by notable organisations as well. The Council of Mortgage Lenders is just one, as it claimed that a recent shift of Funding for Lending from homes to business represented an “improvement in funding market conditions”. Put another way, lending has improved to such a level that government schemes can be withdrawn so that banks and building societies can step in and take over.

The long view

The analysts who expect no such crash in London property values haven’t just reached this opinion through guesswork and hopes for the best, of course. In fact, a great deal of research is expected to be invested in such a forecast, using prior results, current market strength and anticipated developments.

It’s the latter of these – the anticipated industry developments – which gives the optimistic forecasters most reason to be cheerful. Specifically, the goings on in 2016 are those which prove to be the most encouraging.

Within two years time it is anticipated that interest rates will rise from their current low of 0.5 per cent. With Bank of England governor Mark Carney tying interest rates to unemployment levels (offering the reassurance that interest wouldn’t rise until fewer than seven per cent of able Brits were in a job), this is not expected until 2016. Furthermore, even a sudden drop in unemployment would unlikely bring about a quick interest rate rise, as Carney noted that such a measure would more likely be introduced slowly, to give businesses and the public a chance to prepare.

Such an interest rate rise should prove positive for investors. Whilst it would permit healthy price rises in the immediate future, interest rate hikes would also protect against dangerous bubble-like conditions from forming, as they are almost certain to put a dampener on the market, thereby preventing it from spiralling out of control.

On the evidence above, there is every reason to suggest that 2014 could well be the time to buy property in London. Despite what the naysayers may expect, countless forecasters and analysts have said they would be very surprised indeed, should London fall foul of an imminent property crash.

This cannot be guaranteed of course, but fortune favours the brave. The positive here is that you may not need to be that brave when it comes to London property investment after all, as many signals are pointing to it being a rather positive investment opportunity after all.