Housing bubble forming in London, warns Ernst and Young

Overseas buyers form a high percentage of buyers of the most expensive properties in London

The London housing market is exhibiting "bubble-like" conditions, economic forecaster Ernst and Young has warned.

It says the average price in the capital is expected to reach around £600,000 by 2018, 3.3 times the price in the north-east of England.

Asset-price bubbles occur after swift price rises set values at unsustainable levels, which then collapse.

Meanwhile, the independent think tank Civitas says curbs should be placed on overseas buyers of London property.

Civitas says these are needed to rein in "rampant" house price inflation.

Recent official figures from the Office for National Statistics showed average property prices rising strongly across the country.

Prices were 5.4% higher across the UK in November, compared with a year earlier, but were increasing by more than twice that - 11.6% - in London.

Curbs

Civitas's report says the UK property market is being used as an investment vehicle by the global super-rich while hundreds of thousands of younger residents are being priced out of the market and rents are eating into more and more of people's salaries.

The think tank says that non-residents of the UK should only be allowed to purchase a property in London if that investment will add to the number of homes, under a system similar to that in force in Australia.

There, non-residents are not allowed to buy an existing home but may be allowed to buy an unoccupied new dwelling, so long as they can satisfy the authorities that the housing stock has increased.

Other countries that restrict foreign buyers' access include Switzerland and Singapore.

Concern

Civitas said: "London is one of the most - if not the most - attractive property markets for international investors all over the world. It is also at the centre of an affordability crisis in the UK which is having serious consequences for younger people and the less well-off,."

Civitas said that, as well as driving up prices, there are claims that investment at the top end of the market has been distracting developers from the need for more affordable accommodation: "For too many it is providing financial shelter rather than human shelter."

EY is also concerned about conditions in the London property market, where overseas buyers looking for safe-haven investments dominate the prime property market, particularly in central London.

It says the Bank of England may need to think about linking mortgage size to income levels formally.

Andrew Goodwin, senior economic adviser to the EY ITEM Club, said: "House prices across most of the country remain well below their pre-crisis peaks and there seems little danger of a bubble developing.

"But London, which is suffering from a combination of strong demand and a lack of supply, is increasingly giving us cause for concern."