Despite a subdued June which saw prices decline by 0.4% it did little to slow down the annual growth rate of the market.
Figures from the Halifax House Price Index showed that in the twelve months to July prices rocketed by 10.2%, raising questions over the stability of the market.
Stephen Smith, director, mortgage club and housing, Legal & General Network, said: “Whilst price rises may excite some homeowners, we need to see the pace ease off to ensure a sustainable and healthy recovery.
“The challenge for the government is to ensure that any action taken to cool down the market in London does not kill off the recovery in other regions.”
In quarter two this year Halifax data revealed the annualised rate of house price growth in London was 15.9%, a small reduction on the 17% year-on-year growth in Q1.
In its report, The UK Banking System Outlook, ratings agency Moody’s said London and the South East’s fast growing housing market posed a ‘significant risk of a price correction’ without a corresponding increase in real wages.
“With growth rates approaching a pre-crisis pace there is reason to remain vigilant as a significant correction would constrict housing investment, reduce consumer confidence and tighten lending conditions,” the report stated.
Yesterday the Financial Conduct Authority issued its proposed guidance on how lenders should implement and manage the cap on high Loan-to-Income (LTI) lending. The cap was introduced by the Financial Policy Committee (FPC) to restrict household indebtedness amidst rising housing prices. The rule states lending at 4.5 times income should occupy less than 15% of a firm’s new mortgage lending.
But Moody’s said the LTI ratio for UK banks’ riskier mortgage lending is currently at higher multiples above that in 2006 even though mortgage lending and loan-to-value (LTV) ratios remained low relative to pre-crisis levels.
“Lower loan affordability and exposure to higher-than-expected interest rates make household borrowers increasingly vulnerable. The FPC can employ macro-prudential tools to help limit downside risk but the longer imbalances continue the greater the risks to the economy and the banking sector.”
James Hall, director of London estate agent Fishneedwater, said a chronic shortage of housing, rising employment and confidence in the economy was exacerbating competition across the country.
He said: “Still above the national average, we need to be vigilant of London’s rocketing house prices, which are far outstripping wage growth. The possibility of rising interest rates by the start of next year could hit borrowers hard and introduces the risk of those buying now of over-reaching themselves.”
Hall said the risk of a damaging house price correction in the capital was escalating.