UK housing boom poses increasing threat to stability
06-10-2014
Bank of England survey of top financial institutions finds growing concern over rapid house price growth
Britain's recent house price boom has raised concerns among Britain's top financial institutions that the market could be overheating, according to a Bank of England survey.
The Bank's twice-yearly Systemic Risk Survey showed 40pc of top risk managers at UK banks, building societies and asset managers said the risk of property price falls posed a "key risk" to the economy, compared with 36pc of respondents last November and just 14pc in the second half of 2012 Photo: PA
By Szu Ping Chan
Fears among Britain’s top lenders that the recent rapid house price growth could lead to a crash are now close to levels seen during the Great Recession, according to a Bank of England survey.
The Bank's twice-yearly Systemic Risk Survey showed 40pc of UK banks, building societies and asset managers said the risk of property price falls posed a "key risk" to the economy, compared with 36pc of respondents last November and just 14pc in the second half of 2012.
“The majority of respondents focused on the residential market as opposed to the commercial property market,” the Bank said yesterday.
Concerns about surging house prices are now close to levels seen in 2008, when prices fell at double digit rates in some parts of the country. Six years ago, 45pc of respondents cited a house price correction as a key risk.
Ian McCafferty, a Bank of England policymaker, said on Monday that reining in government schemes such as Help to Buy, which offers guarantees for high loan-to-value mortgages, would be “no bad thing” if done proportionately.
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The Bank of England could introduce tough new rules later this month designed to cool the recent house price boom without derailing Britain’s nascent recovery. New lending rules introduced as part of the Mortage Market Review (MMR) in April are already having an effect on loans. Mortgage approvals dipped to a nine-month low in April, according to official data.
While Mr McCafferty is not a member of the Financial Policy Committee, which helps to set UK stability rules, he said tighter mortgage lending criteria would help to reduce the risk of a future house price crash.
“Everyone’s dream in the UK is to own their own home and to live in it, and to that extent we shouldn’t be destroying dreams,” he told LBC Radio. “But at the same time, I think if we look back at the pre-crisis period, it was probably the case that lending proofs and lending rules were far too lax and people were encouraged to borrow far too much relative to what they could really afford.”
Mr McCafferty, an external member of the Monetary Policy Committee (MPC) said the time to raise interest rates was “approaching”. However, he added: “There is scope for the economy to grow a little further before we really get to that point and once we get to that point ... any rises in interest rates we hope will be only gradual for some time to come.”
The Bank of England’s survey of risk managers also showed “geopolitical risk” arising from tensions between Ukraine and Russia also posed a growing threat to UK stability. The Bank said 57pc of respondents cited geopolitical risk as a key threat in the first half of 2014, up from just 13pc in November. This was the fastest increase on record.
In April, Chancellor George Osborne said the Treasury was prepared “for any eventuality” on the Ukrainian crisis.
The survey also showed the risk of an economic downturn now poses the single biggest threat to the UK. However, this was mainly due to a substantial fall in the perceived risk of a sovereign shock from further turmoil in the eurozone.
The Bank also reported that the perceived probability of a fresh financial crisis had fallen to a new low. Almost two-thirds of the 72 participants considered the risk of a “high impact” event to be “low” or “very low”, while just 3pc considered it to be “very high” or “high” - the lowest level since records began in 2008.