Jon Cunliffe: rapid house price growth 'not just a London problem'
07-05-2014
Jon Cunliffe: rapid house price growth 'not just a London problem'
Sir Jon Cunliffe, the Bank of England's deputy governor in charge of financial stability, says double digit price rises are quickly spreading beyond the capital
The danger that rapidly rising house prices could lead to more people taking on higher levels of debt is
Sir Jon Cunliffe, who is in charge of financial stability, said double digit price rises were quickly spreading beyond the capital
By Szu Ping Chan
The danger that rapidly rising house prices could lead to more people taking on higher levels of debt is "not just a London problem", according to the deputy Governor of the Bank of England.
Sir Jon Cunliffe, who is in charge of financial stability, said double digit price rises had spread beyond the capital.
"There are specific issues about London [where prices have risen by 25pc over the past year], but this is not just a London problem. This is not just a London issue.
"In the country as a whole over the last year, prices have gone up by over 10pc ... House prices in the North West have gone up by over 10pc over the past year."
Sir Jon told the BBC that there was a risk to financial stability if house prices continued to rise faster than earnings and this triggered a rise in household indebtedness.
"As house prices go up ... faster than the amount of money people earn, the only way people can buy is to take on mortgages at higher and higher rates compared to what they earn," he said. "Then debt in the economy goes up and that leaves the economy quite vulnerable to shocks."
Last week, the Bank told lenders to limit the amount of high loan-to income loans - defined as more than 4.5 times a buyer's income - to 15pc of new business. Banks must also "stress test" borrowers' ability to pay their mortgage even if interest rates were three percentage points higher.
Sir Jon said action taken by the Bank to rein in the market had focused on protecting the economy from future shocks. "What we must try and do is to stop that pressure on house prices leading to higher mortgages relative to what people are earning."
In a separate speech on Thursday, Sir Jon also said the impact of the Great Recession had made policymakers "more prepared to use monetary policy to address financial stability risks" rather than just follow a "one instrument for one target" rule.
However, Sir Jon stressed that there was a "high cost" associated with using interest rates to deal with financial stability risks. He said the Bank would use its extensive powers to implement a set of macroprudential tools designed to build up resilience in the financial system and ensure monetary policy would not have to "mop up" the mess of another crisis.
The former Treasury mandarin said that policymakers had to work on ensuring that that the financial system could "manage the known, likely risks it faces" as well as be "resilient to the risks of events that are improbable but possible [and] to risks that simply cannot be foreseen".
The Bank is currently stress testing the ability of Britain's biggest lenders to withstand a 1980s style recession in which house prices fall by more than a third and unemployment jumps to 12pc. Sir Jon said that while this was not a likely scenario, it was one lenders should be prepared for.
"We want the financial system as a whole to be able to withstand such a shock without a breakdown in the essential functions on which the economy depends," said Sir Jon.
The results of the bank stress tests are due to be published in the Autumn.