As Australians wonder whether regulation and government policy might make a difference to spiralling house prices, there's one market they should have a close look at.
London.
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Despite taking a hammer blow from the financial crisis this is one of the most effervescent – and infuriating – housing markets in the world. Sound familiar, Sydneysiders?
London's homes have more than doubled in price since 2009. The latest index from January put London's average price of a house at £491,000 ($801,000).
It's worse than Melbourne, Brisbane or Adelaide – though less than Sydney – but take into account lower salaries in London and the price-to-earnings ratio is about the same as Sydney (the average home costs 10 times the average wage). Also, the homes are smaller.
As a result, home ownership in Britain is at its lowest proportion since 1985. In London only half the population are owner-occupiers. PwC last year forecast that by 2025 just 40 per cent of Londoners would own their own home.
Just like in Australia, it's smashed avocado all round: Generation Rent is growing. And the rents aren't cheap, either.
"You've had a correction in the high end of the central London market but the capital as a whole continues to see fairly rapid price growth," says Liz Martins, British economist at HSBC.
![London's homes have more than doubled in price since 2009.](/web/20170407090136im_/http://www.smh.com.au/content/dam/images/g/v/f/n/x/y/image.related.articleLeadwide.620x349.gvfmxg.png/1491552978915.jpg)
One of the biggest factors along with strong population growth is under-supply, which has been increasing for decades due to strong local resistance to new developments.
Another key driver is low interest rates – mortgage rates continue to fall, driven by a lot of competition in the British banking sector.
![Just like in Australia, it's smashed avocado all round: Generation Rent is growing.](/web/20170407090136im_/http://www.smh.com.au/content/dam/images/g/v/f/n/x/j/image.related.articleLeadwide.620x349.gvfmxg.png/1491552978915.jpg)
Another of the factors, says David Catt, chief operating officer of property analytics business Hometrack, is a big slug of cash buyers in the market. Every bonus season, City bankers have fat cheques to spend. Meanwhile, investors from around the world are parking their capital in London's real estate while many Brits are buying second or third homes.
The cash piles up in the centre of London and flows along the rail networks – even far-flung satellites like Slough and Luton see 30 per cent price rises year on year.
It's important to note the British government hasn't sat on its hands.
In 2014 the Conservatives raised stamp duty on homes over £1 million. Catt says it initially worked – the million-plus market "ground to a halt" for a while. However, it has inflated prices at the cheaper end of the market because of the effect on supply.
In 2016 the government tried again – doubling stamp duty for additional residential properties, and adding new regulations to catch those who tried to park property in offshore trusts.
Martins says buy-to-let was one of the biggest drivers of price growth – at its peak it was accounting for about 25 per cent of new mortgages. The stamp duty change acted as a big deterrent.
"That really has been quite an effective policy," she says.
However, Catt notes that for overseas investors the extra stamp duty made little difference. "The tax was still just the cost of parking your money – it's nearly irrelevant to these people," he says.
Another key player has been The Bank of England, which set new affordability rules for mortgages in 2014 that got rid of interest-only loans above a tight loan-to-value ratio.
There were rigorous new affordability criteria which some banks applied to almost absurd extents, burrowing into borrowers' household budgets and raising red flags at childcare costs, even pensions.
They set a lower cap on the earnings multiple banks could lend at, and required lenders to stress-test a borrower's mortgage at higher interest rates.
"It had a massive cooling effect in the domestic market," says Catt.
However the lending rules don't affect the international market, or the buy-for-cash market. As a result the London housing market continued to bubble.
Last year the regulator acted again, tightening rules on buy-to-let borrowers, requiring landlords to have higher levels of rent relative to their mortgage costs, and removing some of their tax advantages.
However Catt is cynical about the benefits. He says landlords simply rushed to the lower end of the market for better yields.
Meanwhile, the government had given itself – or rather, first-home buyers – a problem by making homes harder to buy. So it had to introduce subsidies for younger people to get them on the ladder.
There is the Help to Buy scheme, which gives first-time buyers a modest bonus to their savings for a deposit, then lends them up to 20 per cent of the cost of a newly built home.
In London the scheme is more generous – reflecting the tougher market – with an upper limit of 40 per cent on the equity loan.
However it is not clear where the benefits of the subsidies have really ended up – with the buyers, or with the developers building new apartment blocks aimed at the first-time market.
There is also a Shared Ownership scheme, under which first-time buyers can buy a share of their home – between 25 per cent and 75 per cent of the value, and pay rent on the remaining share.
Catt says this has been a modest success – giving people a stake in the property market that can grow with the market.
"It's a subsidy, and wherever you get subsidies ... in a capital market will lead to price distortion," he says. "We've chosen long-term stability and subsidy and [to] put the patient on life support, over tough medicine."
Martins says there has been a tension between the regulator's attempts to suppress price growth, and the government's attempts to subsidise house purchases.
"On the one hand they do want to support young people, first-home buyers in making it possible for them to own their own home," she says. "But at the same time they don't want to get price growth too out of control."
Australian regulators and policymakers face this same tension as they look to cool the property market and help young buyers.
The lessons from London are that policies can have an effect, but that they can also have unexpected side-effects.
And the biggest lesson is that, if you don't want to risk a price crash, you have to be patient. In London the market is slowing but the earnings-to-borrowings ratio is still sky-high, and deposits are beyond many young people on average salaries who can't rely on the bank of mum and dad.
The government and the regulator have been tackling the problem for half a decade, but unaffordable housing is still one of the most vexing problems in British capital.