'Dangerous' to ignore house price boom, warns BoE deputy
05-03-2014
Bank of England deputy Jon Cunliffe argues it would be “dangerous to ignore the momentum that has built up in the UK housing market”
Surging house prices pose the single biggest threat to UK financial stability, the deputy Governor of the Bank of England has warned.
Mr Cunliffe, who is in charge of financial stability at the Bank, suggested that it might have to take radical steps to curb the recent housing boom, which could include introducing a cap on how much Britons can borrow. Photo: Alamy
By Szu Ping Chan
Surging house prices pose the single biggest threat to UK financial stability, the deputy Governor of the Bank of England has warned.
Sir Jon Cunliffe said that policymakers must decide quickly whether to take action to cool the market and, in the starkest warning yet that rapid price rises could derail Britain’s recovery, argued that it would be “dangerous to ignore the momentum that has built up in the UK housing market”.
Price rises had not been limited to London and “pent-up demand” could “add significantly" to pressure on the market for the next few years. "All of this paints a picture of further pressure on transactions that could take us quickly to pre-crisis rates,” he said.
House prices grew nationally by 1.2pc in April, making prices an average 10.9pc higher than a year ago, according to Britain’s biggest building society, Nationwide. Prices are accelerating again after what had appeared to be several months of gradual slowing, with the first double-digit increase for four years.
While Sir Jon said the Mortgage Market Review (MMR) rules introduced last month could reinforce tighter underwriting standards and create a “soft landing” for prices, there was also reason to believe that a “mutually reinforcing combination of strong demand, weak supply and expectations of a rising market could lead to a period of sustained and very powerful pressure on house prices in the UK.”
This would risk a “major overshoot in prices and build-up in debt, followed by a sharp correction with negative equity and an overhang of debt for many households,” he said. “This is a movie that has been seen more than once in the UK.”
Sir Jon, who is in charge of financial stability at the Bank, suggested that it might have to take radical steps to curb the recent housing boom, which could include introducing a proportional cap on how much Britons can borrow.
Sir Jon told an audience in London on Thursday that there was also evidence that the Government’s Help to Buy Scheme could be pushing up prices.
He said that while mortgage approvals had fallen for two straight months, if the pace of annual growth were to continue, approvals would reach the pre-crisis average of 120,000 per month before the end of the year.
“There will always be a number of blinking warning lights – risks generated at home and risks coming from abroad – on our dashboard,” said Sir Jon. “The growing momentum in the market is now in my view the brightest light on that dashboard.”
Sir Jon said the Financial Policy Committee could recommend a further tightening of rules, such as imposing limits on loan-to-value ratios as soon as the next committee meeting in June. While such strict rules re commonplace in countries such as Hong Kong and Canada, they would be unprecedented in the UK.
Earlier this week, Spencer Dale, the Bank’s chief economist, admitted that the Bank was “nervous about what is going on in the housing market”.
The ability of British lenders to weather a 35pc house price crash was also placed at the heart of recent stress tests published by the Bank.