The founder of Devon-based Philip J Milton & Co said economists, bankers and politicians are wrong to believe that soaring house prices will help the economy to recover in the same way that Britain benefited from the surge in house building between 1932/34.
The adviser said that the current strategy would hit those who have borrowed too much as well as banks who have lent mortgages on homes with “inflated values”.
He said: “Too many are stretching themselves to borrow as much as they can now and are affording present repayments with little thought to the inevitable increase in interest rates and the multiplication of their monthly payments.”
Mr Milton’s remarks echo the latest warning from Sir Jon Cunliffe, deputy governor for financial stability at the Bank of England, who said the housing market poses the “biggest risk” to the UK economy.
Speaking in Liverpool last week, Sir Jon said rising house prices would tempt households to take out ever-larger mortgages, tipping them into debt and leaving the economy “exposed” to potential shocks.
“The main risk we see arising from the housing market is the risk that house prices continue to grow strongly and faster than earnings and – and this is an important ‘and’ – this increase in prices leads to higher and more concentrated household indebtedness. In short, the risk that more people take on higher debt relative to their income as they have to stretch further to buy homes.”
However, he cautioned against using interest rates as the main tool for cooling the market. He said: “Using interest rates to deal with financial stability can carry a high cost. So although it is an effective line of defence, it should be seen as one of the last lines of defence.”