London's so cool

London-UK house-price divergence is manna for BoE

The latest property market data are manna from heaven for the Bank of England. London looks set to underperform the wider UK housing market. That will make monetary policy much easier to manage.

Property site Rightmove says London asking prices fell 5.9 per cent in the four weeks to August 9, with Kensington and Chelsea down seven per cent. Asking prices fell 2.9 per cent in England and Wales overall. Last week Hamptons, a high-end real-estate agent, reported rising stock levels in the capital.

Realised prices may yet hold up. And a month of London underperformance would not reverse five years of massive gains relative to the rest of the UK. But Rightmove's snapshot is the hardest evidence the trend is reversing. That would be a return to the pattern seen between 2001 and 2006. In those five years, UK house prices rose 91 per cent, while those in Greater London went up 66 per cent, according to Nationwide. The average price of a house in Prime Central London went up 33 per cent, with flats up 24 per cent, according to John D Wood estate agents. In mid-2006, London property took off, propelled by the credit boom and the flourishing financial sector.

While credit is still cheap, stronger sterling and a tougher UK mortgage regime means that foreign and domestic buyers are in shorter supply. A repeat of history would make policymakers relax. To start with, calls for property market intervention - effectively for the central bank to use nationwide policy to cool London - would fade away. A slowdown in the capital would demonstrate the market is self-policing as rental yields for the poshest residences touch 2.2 per cent. A narrowing London-national price gap would quiet worries on property bubbles. Rental yields in some northern cities have been at six per cent, a long way from danger territory. The economies in those cities would probably benefit from higher property prices. London would allow the BoE to keep rates low and let house prices gently inflate where the increases are safe and helpful.