Sat, May 03, 2014 - Page 15 News List

Bank of England warns of housing market crash

The Guardian

Britain’s booming housing market could be heading for a fresh crash, the Bank of England said on Wednesday in its toughest warning yet about the dangers of the return of rapidly rising property prices.

Sir Jon Cunliffe, the central bank’s deputy governor for financial stability, said it would be dangerous to ignore the momentum apparent across the country and dropped strong hints of new measures to slow down the market.

On a day when it emerged that one in 15 London homes are selling for £1 million (US$1.69 million) or more, Cunliffe said Britain had a history of booms turning to bust.

Cunliffe said that there were always risks to financial stability “blinking on the dashboard,” but made clear his concern about the possibility that borrowers taking on large mortgages could find themselves in trouble when interest rates inevitably rose.

“The growing momentum in the market is now in my view the brightest light on that dashboard,” Cunliffe said. “It has not yet been accompanied by a substantial increase in aggregate mortgage debt, though gross mortgage lending is growing and there are signs that debts are becoming more concentrated.”

Cunliffe said the housing market could have a “soft landing,” as houses became less affordable and lenders tightened up the conditions for granting homes loans.

“But other outcomes are very possible and the financial policy committee [FPC] will need be both vigilant and ready to act,” he added.

He said the risk was of “a major overshoot in prices and buildup in debt followed by a sharp correction with negative equity and an overhang of debt for many households.”

“Unfortunately, there are more precedents in UK for periods of a rapidly growing housing market to end in this way,” he added.

The FPC was set up by Chancellor of the Exchequer George Osborne to prevent destabilization of the economy by the sort of asset price bubbles that emerged before the crash of 2007. Cunliffe said deciding what to do about the momentum would be its top priority.

Nationwide Building Society data on Wednesday showed annual house price inflation at a seven-year high of 10.9 percent.

“There is good reason to believe that a ... 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,” Cunliffe said.

Earlier this week, the central bank announced stringent stress tests designed to ensure that lenders could absorb a 35 percent drop in house prices, a fall that would be unprecedented in the UK. Cunliffe said the bank was worried that more and more people were getting into debt that could pose a risk to the recovery.

“Given their sensitivity to a change in economic conditions, a ‘long tail’ of highly indebted households could represent a vulnerability for the banks and the economy. The data suggest that the size of this tail is increasing,” he said.

The society said its Land Registry data analysis showed that in London the proportion of sales involving homes costing more than £500,000 had leaped from 13 percent in 2007 to about 25 percent last year. For properties costing more than £1 million, the figure has more than doubled from 3 percent to 6.5 percent over the same period.

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