House price inflation is particularly high in London, and is becoming more widespread, the IMF has stated.
In the closing statement to its annual inspection visit, the International Monetary Fund has stated the UK economy has rebounded strongly and growth is becoming more balanced.
But the IMF has warned while there are few of the typical signs of a credit-led bubble a steady increase in the size of new mortgages compared with borrower incomes suggests households are gradually becoming more vulnerable to income and interest rate shocks.
Macroprudential policies should be the first line of defence against financial risks from the housing market, the IMF stated. But in the UK the objective of macroprudential policy is to address systemic financial risks, not house price growth, it noted.
In an environment where expectations of capital gains can quickly drive up household indebtedness - and thus systemic risk for financial institutions - the IMF stated more policy action is warranted.
The IMF pushed for limits on the proportion of high loan-to-income (LTI) mortgages that any lender can issue, arguing such a move would help to contain directly the currently most pressing risks to financial stability.
If such limits prove insufficient, the IMF argued outright caps on LTIs or loan-to-value ratios may need to be considered.
Raising lenders’ sectoral capital requirements would build additional buffers against increased exposures to the housing sector, the IMF added.
The IMF’s comments came in the same week that the Royal Bank of Scotland Group became the second UK lender to clampdown on high income multiple loans, joining fellow state-backed lender Lloyds in applying a strict four times income multiple on Londoners seeking a mortgage over £500,000.
The IMF also noted while Help to Buy has helped creditworthy lower-income households to purchase homes, especially outside London and the south east, if flows of credit to these individuals increase significantly from other channels then the Treasury should contemplate pulling the plug on the scheme.
As the volume of high-LTV transactions increases, the IMF stated the government and regulators will need to evaluate if the program is contributing to financial risks.
Imbalances in the housing market should be addressed through supply-side remedies, the IMF pointed out.
The IMF stated: “Fundamentally, house prices are rising because demand outstrips supply. The UK has a secular problem with inadequate housing supply, associated with planning restrictions and compounded by depressed housing starts since the financial crisis.
“Macroprudential and monetary policies can only be temporary palliatives to an underlying problem.”
