LONDON, Feb. 3 (Xinhua) -- Housing market in London is beginning to show signs of bubble-like conditions, said a research report issued by Ernst and Young Item Club (EY ITEM Club) on Monday, while asking the government to monitor the trend closely and be prepared to intervene.
The EY ITEM Club forecast showed the average house price in London is expected to reach nearly 600,000 pounds (980,000 U.S. dollars) by 2018, some 3.5 times the average price in Northern Ireland and more than 3.3 times the average in the North East.
It said the average house prices in Britain growing by 8.4 percent this year and 7.3 percent in 2015, before cooling to around 5.5 percent in 2016.
House prices would show a regional divergence. Outside of London and the South East, the regions with the highest levels of house price growth are expected to be the South West and East of England, both set to grow by 6.2 percent from 2013-18.
In contrast, the North East is expected to have the lowest level of price growth at 4.2 percent, with Scotland at 4.5 percent and the West Midlands at 4.6 percent.
The report said income multiples are now back to pre-financial crisis levels in London, with homeowners taking on ever larger mortgages. Caution on the part of borrowers and lenders should prevent a serious problem developing.
The EY ITEM Club suggested a macro prudential intervention over higher interest rates, so the Bank of England's Financial Policy Committee (FPC) would need to play a central role. If it decides to intervene it should be to impose a formal limit on income multiples.
Andrew Goodwin, senior economic advisor to the EY ITEM Club comments: "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."
"Some have suggested that Help to Buy should be altered or cancelled but this is a red herring. The scheme has only a very limited impact on the capital and withdrawing it could risk choking off the recovery in housing transactions across the rest of the UK without solving any of London's issues," Goodwin said.
Goodwin says that while recent trends had been very encouraging, it would also be advisable for the government to do more to ensure that the pickup in housing supply continues.
He suggested the government to do more to resolve rigidities in the planning system, with a particular focus on ways to increase supply in and around the London area.
"The government still owns a sizeable amount of brownfield land which could be sold off to house builders more quickly than it is currently," he said.
"On a larger scale there is also a case for the government to use its own low borrowing costs to fund a program of house building,"he concluded.