FPC to undertake ‘close monitoring’ of housing market

The Financial Policy Committee has turned its eye to the housing sector in view of rising property prices, stating that it needs to be vigilant to potential emerging vulnerabilities in the financial system.

Minutes of an FPC meeting published today (1 October) largely credit the continued recovery of the UK banking sector with a further easing in credit conditions, and add that the housing market recovery appears to have gained momentum and is broadening thanks to the aid of several public policy measures.

The minutes said that in light of improved mortgage approvals and rising house prices, it will undertake “close monitoring” of developments in the housing market and banks’ underwriting standards.

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The minutes also said it was “important” that the committee could develop a “deep analysis” of the ways in which housing developments might affect financial stability.

However, it highlighted that not all movements in house prices necessarily had financial stability implications, flagging up largely cash-financed transactions or if lenders had substantial capital to absorb any losses on mortgages.

The FPC also decided that it should review the range of tools that could be used to mitigate risks to financial stability, “should that become necessary”. Those tools included, amongst others, supervisory guidance on underwriting standards, sectoral capital requirements and recommendations to the regulators on tightening of affordability tests.

The committee agreed that, if it became necessary to deploy its tools, they would be used in a way that was proportionate to the risks and consistent with a graduated response, the minutes said.

According to the minutes, mortgage approvals in July has been 30 per cent higher than a year earlier and house prices had risen by 5 per cent in the year to August, and even more in London.

It added that recent survey data showed how rapidly housing market expectations could respond to a recovery in consumer sentiment and “there was uncertainty” about how rapidly housing supply would respond to any rise in demand.

Nevertheless, housing activity and loan-to-value ratios on new mortgage lending remained below their historic averages; households’ debt servicing costs were low; the ratio of house prices to earnings was at its level of a decade ago; and the committee judged “that there were few signs yet of house prices rising solely in anticipation of future price increases”.