London house price differential 'widest for 20 years'

The gap between house prices in London and those in other major cities is at its widest for 20 years, according to property analysts Hometrack.

At £437,700 on average, property prices in London already cost a record of more than 12 times average earnings, having increased by 10% over the last year, Hometrack said.

It said momentum in the London market was now coming from commuter belt areas such as Barking and Dagenham rather than central areas of the city.

The continued increase in prices there was likely to have a knock-on effect for other major cities, Hometrack said.

Buyers may reach a tipping point where they ditch the idea of living in or near to London completely, and instead set their sights on another city outside the capital offering better value.

This may in turn start to push up prices in these cities as more house hunters flood into these markets.

Hometrack said the rise of London house prices had seen the gap between average property prices in London and those in other major regional cities widen to its greatest level for 20 years.

For example, someone could now buy around four typical homes in Glasgow, or three in Manchester, or two in Bristol, for the price of one in London.

Hometrack said the growing price gap could also help other city regions attract new investment as investors and developers sought to expand in more affordable markets.

It said that a changing mix of buyers was compounding the upward pressure on house prices generally, with half of buyers in the first half of 2015 having no property to sell - such as first-time buyers and property investors.

With these buyers taking properties off the market but having no property to put back on it, this has the effect of eating into the supply of properties for sale and increasing competition between buyers for the properties that are left on the market.

Richard Donnell, director of research at Hometrack, said a similar housing market cycle took place in London in the early 2000s, when house prices there were "going like a steam train" but then started to drift, before undergoing a "huge catch-up" in the mid-2000s when they started to look like better value once more.

He said: "London's price/earnings ratio is at an all-time high, while there remains value in most other regional cities.

"The pricing differential to London could well assist city regions attract new investment as the cost of housing starts to influence decision making for both households and businesses."

The findings come after the National Association of Estate Agents (NAEA) reported that the supply of homes for sale across the UK plunged to an 11-year low in August.

Mark Hayward, managing director of the NAEA, said: "There simply aren't enough houses to match demand and we're reaching crisis point."