London house price boom could 'unravel', warns Deutsche Bank

Property prices in the nation’s capital have rapidly outpaced the rest of the country. From lows in 2009, house prices in London have soared by almost 50pc since the economic crisis, and are now 20pc above their pre-crisis peak, according to Deutsche Bank research.

House prices in the rest of the UK have generally struggled to recover post-crisis as wages have remained stagnant. Property prices in the regions remain exposed to even small increases in the Bank Rate that could rapidly make mortgage payments unaffordable.

Household finances remain stretched and exposed to any increase in the cost of mortgage finance. A toxic combination of rising interest rates, a strengthening of the pound and further austerity could all result in the long run average of growth slowing to 2pc as soon as next year, say economists from Deutsche.

The Bank of England’s Financial Policy Committee said it would “remain vigilant to emerging vulnerabilities” related to the recovery in Britain’s housing market and would "take further proportionate and graduated action if warranted."

The Federal Reserve also has been tightening its monetary policy by reducing the amount of bonds it buys by $20bn to $65bn a month. The US central bank has also said it could raise interest rates from near-zero to 1pc next year and 2.25pc the year after.

The reduction of US easy money has seen the value of Chinese currency fall, which could see cash rich buyers pull back from investments abroad. This could have a knock on effect for London house prices as off-plan new development flats have proven wildly popular with Asian buyers.

According to figures from Nationwide on Wednesday, London house prices are now 100pc more than those elsewhere in Britain , with the difference in price between the average home in and outside London now £183,000.

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