LONDON — For decades, the modest two-bedroom apartment off Abbey Road was home to some of London’s neediest, a small, leaky outpost in this city’s vast constellation of public housing.
Worn down by time and neglect, its kitchen and bath were barely functional, its carpet rank.
But in the blistering real estate market that is London, even humble dwellings can become hot properties. So when the unit was renovated and put on the private market last month, it didn’t take long to sell — for a million dollars.
Such eye-popping prices explain why, just six years after the global economy melted down from an overheated housing market fed by cheap credit, concerns are rising that Britain could be blowing another bubble. At stake is a still-fragile recovery — one that appears to be gathering pace but that could easily be thrown off course by another cycle of boom and bust that seeps from one nation to the next.
“Housing prices rising modestly makes people feel better off, and that’s good for the economy,” said Howard Archer, chief European economist at IHS Global Insight. “But what you don’t want is housing prices racing ahead, because we know well that that will end in tears. We’ve been there before.”
Race ahead they have, climbing last year at their fastest pace since 2007, the year before the most recent bubble burst. Some forecasters worry that growth will be even quicker this year as the government steps in with a politically popular — but economically dubious — stimulus program aimed at opening the real estate market to buyers who wouldn’t otherwise qualify.
The program has exposed a deep rift within the government, with Prime Minister David Cameron’s secretary of state for business warning that it could help stoke a “raging housing boom” in London and other parts of southeast England. “The government has done really good work turning the economy around. We can’t now risk it being derailed by a housing bubble,” Vince Cable, a member of the government’s junior coalition partner, the Liberal Democrats, told the Daily Telegraph this month.
The anxiety over a possible bubble adds an ominous undertone to what is otherwise the brightest economic landscape Britain has enjoyed since it fell into recession in 2008 and then limped through an anemic, at times barely perceptible recovery.
Unemployment is dropping, retail sales are rising and consumer confidence is growing. Many economists expect the recovery to finally pick up its pace this year.
Cameron and his allies, eager to tout the economy’s strength ahead of elections expected in the spring of 2015, have pointed to the real estate market as another positive indicator and dismiss any suggestion that rapidly rising prices could lead to another bust.
Cameron this month called fears of a bubble “London-centric,” noting that the rise in prices has been concentrated in the capital and the surrounding area, while prices elsewhere remain well below their peaks.
“I think if you look across the country, there are many parts of the country where house prices are barely moving at all,” he said.
But London is no small matter — it’s far and away Britain’s largest city — and the property boom here has been unmistakable.
Throughout the recession and its aftermath, London property became the investment vehicle of choice for many wealthy Russians, Chinese, Arabs and others who sought a safe place to park their cash amid global economic and political storms.
Real estate agents say that Britons are increasingly getting in on the act, eagerly scooping up properties for record prices. In one fast-changing area of central London — Little Venice — agents say that per-square-foot prices have nearly doubled in the past two years.
Supply is stretched to the limit in this crowded and ancient city, where construction is tightly regulated. Demand, meanwhile, shows no signs of easing. Even former public housing units, which can be converted and sold privately, become the objects of intense bidding wars whenever they hit the market.
“It’s mental,” said Richard Hudson, 30, who lives more than an hour outside London and commutes into the city. “My dad bought a house for 5,000 pounds [in the 1970s]. It’s now worth a quarter of a million. I don’t think in another 30 years it will be worth 3 million. It can't go up and up and up. It has to even out at some time. Right?”
John Van Reenen thinks that time could come sooner than the government expects. By making it easier for applicants to get a mortgage with only a 5 percent down payment through the Help to Buy program, he said, Britain is risking another bust.
“When you pump up demand without doing anything about supply, you’re going to get another big rise in prices,” said Van Reenen, who directs the Center for Economic Performance at the London School of Economics. “It’s like giving a bottle of whiskey to someone who’s in a 12-step program as a reward for staying off the booze.”
And yet, for those who would otherwise be priced out of homeownership by the galloping market, Help to Buy has proved to be a winner.
Michael Williamson, a 34-year-old claims adjustor, said that in his small town of Hammersmith, 130 miles northwest of London, prices and mortgage rules conspired to put homeownership out of reach — even on his annual salary of 50,000 pounds, or $82,000.
But when Help to Buy kicked in last autumn, he was suddenly able to purchase a century-old, two-bedroom house for a little more than 125,000 pounds, or $200,000. To Williamson, the purchase looks less like speculation in a frothy market than a leg-up on a better life.
“It’s about time the government did something to help,” he said. “I don’t come from a rich family, so I don’t have parents who will give 15,000 pounds for a deposit. That’s not available to me. I’m genuinely pleased Cameron has done something for the working man, which is me.”