The Bank of England has admitted it would be “dangerous” to ignore rapidly rising house prices in its strongest warning yet on the threat posed by a house price bubble, saying that if the Mortgage Market Review fails to slow down property prices it may be forced to step in.
In a speech in London last night (1 May), Sir Jon Cunliffe, deputy governor, pointed out that it is “particularly important” to ensure now that current low levels of borrowing costs do not mask the likely cost of mortgages and “create more headroom for prices to rise”.
He said: “In this regard, the reforms following the [Financial Conduct Authority’s] Mortgage Market Review, which came into force last week, should help to ensure that affordability constraints do act against pressures on house prices. But they have not yet been tested.
“It would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year.
“The extent to which that will jeopardise financial stability depends on whether that pressure actually results in more transactions at higher prices, whether that in turn leads to an increase in household indebtedness and where that debt is concentrated.”
Sir Jon said that the tougher affordability tests and “lender constraints” brought in under MMR should “act increasingly as a brake on momentum”. However, he added: “Other outcomes are very possible and the Financial Policy Committee will need be both vigilant and ready to act.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, said yesterday that while the MMR may cause a slowdown in lending, “this is likely to be nothing more than a blip, given the pent-up demand to buy”.
Sir Jon noted that Nationwide data, released yesterday, revealed that property prices grew by a double digit 10.9 per cent in the 12 months to April.
Speaking to the Worshipful Company of International Bankers, he added that growth has not been limited to London – house prices rose by more than 5 per cent in 10 out of 12 UK regions across that year.
He attributes this momentum in the housing market to several factors: a pick-up in confidence and more readily available mortgage credit including through the government’s help to buy scheme. “Together these factors may have unleashed pent-up demand”, Sir Jon said.
Many market commentators including the Royal Institution of Chartered Surveyors have warned that property supply needs to increase to support the demand for housing and Sir Jon agreed.
Sir Jon said: “There is good reason to believe that a mutually reinforcing combination of strong demand, weak supply and expectations of a rising market could lead to a period of sustained and very powerful pressure on house prices in the UK”.
He warned the “unusually low level of housing market transactions” seen in the aftermath of the crisis means that transactions were, cumulatively, over 3m lower, between 2008 and 2012, than their long term average.
He said: “Given that many house purchases are strongly linked to life cycle changes, many of these lost transactions may have only been delayed until credit conditions and confidence about the future improved. It is not at all implausible that this pent up demand could significantly add to pressure on the market for the next few years.
“Historically, supply has not kept pace with demand for housing in the UK, with the effect that when demand grows strongly, house prices can keep rising quickly for a long time. This is a movie that has been seen more than once in the UK.
“The Bank and the FPC have to decide whether to address the momentum in the housing market and the rapid rates of growth in prices and transactions, which, in the past, have tended to lead to rapid growth in mortgage debt.”
