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Housing market threatening UK economy, Bank of England official says Household debt serious threat to UK recovery, says Bank of England deputy
(about 3 hours later)
Bank of England deputy governor Sir Jon Cunliffe has warned that the housing market is the "biggest risk" to the UK economy. The Bank of England deputy governor Sir Jon Cunliffe has warned that household debt is a key risk to the UK recovery and said that the Bank's new measures to rein in the housing market should be thought of as insurance against a major crash.
Cunliffe, who is in charge of financial stability at the central bank, said a particular threat was prices rising faster than people's incomes. "That leads to... a big increase in the amount of debt in the economy," he told BBC Radio 5 Live. A few days ago he outlined his concerns about rising household indebtedness, warning that Britain's obsession with home ownership could leave the Bank powerless to control household debt. In a speech at the International Festival for Business conference in Liverpool, Cunliffe noted that UK household debt is equal to 135% of household earnings, compared with 110% in 2000 and 165% in the run-up to the financial crisis. This is markedly higher than in other European countries, and on a par with the US, he added.
His latest comments came after figures from Nationwide, Britain's biggest building society, showed the average price of a property in London has risen by more than a quarter to £400,404 over the past year, a rate of growth not seen since the summer of 1987. Last week, the Bank's financial policy committee (FPC) laid out measures to limit risky lending, but stopped short of taking more drastic steps to cool the housing market. The measures – the first limits on the mortgage market in 30 years – include that lenders must check mortgage applicants can cope with a 3 percentage point rise in interest rates – slightly tougher than current affordability checks. From October, there will be a 15% cap on the number of mortgages that banks and building societies can give to people who want to borrow more than 4.5 times their income.
Last week, the Bank of England's financial policy committtee laid out measures to limit risky lending, but stopped short of taking more drastic steps to cool the housing market. The measures – the first limits on the mortgage market in 30 years – include that lenders must check mortgage applicants can cope with a 3 percentage point rise in interest rates – slightly tougher than current affordability checks. From October, there will be a 15% cap on the number of mortgages that banks and building societies can give to people who want to borrow more than 4.5 times their income. Cunliffe, who is in charge of financial stability at the central bank, said: "An outcome in which house prices grow more rapidly relative to income and do so for longer is ... quite plausible. It has certainly happened before in the UK. We know the pressure from demand for homes is great and that the supply of new homes is quite weak."
Cunliffe told the BBC that a "sustained rise" in house prices would be of concern. "Some months ago I thought the biggest risk at that point came from the UK housing market in Britain," he said. "And it's not the risk around house prices as such, it's the risk that we get a sustained rise in house prices - and this is very important - [the risk of] house prices rising faster than people's incomes. That leads to the sustained increase, a big increase in the amount of debt in the economy, in the amount of debt that mortgage holders have." He concluded: "The stress test of the major UK banks towards the end of the year will assess the resilience of the system to a major crash. The steps taken last week are insurance against the possibility of a sustained boom in the housing market leading a substantial increase and concentration in household debt that could make a crash more likely and more severe."
The International Monetary Fund has also identified rapidly growing house prices as the biggest threat to the UK's economic recovery. He said the main risk from the housing market is that house prices continue to grow strongly and faster than earnings and lead to more household debt. "In short, the risk that more people take on higher debt relative to their income as they have to stretch further to buy homes."
His comments came after figures from Nationwide, Britain's biggest building society, showed the average price of a property in London has risen by more than a quarter to £400,404 over the past year, a rate of growth not seen since the summer of 1987.
In an earlier interview with BBC Radio 5 Live, Cunliffe identified the housing market as the "biggest risk" to the UK economy. A few days ago Cunliffe warned that Britain's obsession with home ownership could leave the Bank powerless to control household debt .
The International Monetary Fund has warned the UK government that rapidly growing house prices are the biggest threat to the country's economic recovery.