London house prices: Alarm on home loans as prices surge
07-03-2015
The Bank of England today raised the alarm over homebuyers taking on bigger mortgages as house prices continue to soar in London.
In a dramatic intervention, Sir Jon Cunliffe, the bank’s deputy governor for financial stability, warned of the “risk” to Britain’s economy from people piling on debt which they may struggle to repay.
“Our concern is not so much about house prices, it is the chain between high house prices, prices growing faster than people’s incomes, and people having to take out bigger and bigger mortgages and the debt that families then have relative to their income growth,” he told BBC radio.
The bank chief spoke out as new figures from Nationwide Building Society showed house prices in London jumping by 7.3 per cent in the past year to June. Highlighting London’s housing crisis, Communities Secretary Greg Clark warned that tens of thousands of young people were being “exiled” from where they grew up because they could not afford a home there.
He spoke out as new research laid bare how far first-time buyers are having to stretch themselves to stand any chance of getting a toe-hold on the property ladder.
Half of all first-time buyer loans in London were for properties priced between £250,000 and £500,000 this year compared with only a quarter five years ago, according to figures from online estate agents SellMyHome.co.uk today.
The Bank of England intervened last year as property prices rose by telling mortgage lenders to limit the number of loans worth more than 4.5 times income to no more than 15 per cent of the total.
Sir Jon said this “insurance policy” was still needed because of renewed signs of upward pressure on prices.
“It is that debt-to-income (ratio) of British households that creates the risk,” he said today. “The market cooled down last year. Prices stopped growing as fast as they have been, mortgage approvals came down. There are now signs the market is coming back up again.
“Given the high level of debt to income we have in the UK anyway, and the ability of this market to move very fast, this is something we need to watch.”
The research from SellMyHome.co.uk found that a first-time buyer with a typical budget of £250,000 would only be able to afford 13 per cent of flats sold in Hackney this year, down from 50 per cent in 2010. Across London as a whole less than one in three flats would be within their reach.
Price increases in London have slowed since early last year but values are still about 40 per cent above levels seen before the last peak in 2007.
Separate data from estate agents Your Move and Reeds Rains show that the average first-time buyer price in London was £303,374 in the three months to May. This was funded by an average £69,040 deposit and a typical mortgage of £234,533.
Most City economists believe that the first Bank of England interest rate rise for close to a decade will come in the first half of next year as the Bank moves to snuff out the threat of a spike in inflation fuelled by higher wages.
Speaking to the Local Government Conference in Harrogate, Mr Clark was due to say that “exile” was once a penalty reserved for extreme offences — but now young people were being forced to leave their home areas by prices. He added that without enough homes that young people could afford, the “chain of community” could be broken.