Jon Cunliffe, who will join the Bank of England as deputy governor for financial stability next month, said the housing market is not in a bubble as prices are rising from historically low levels.
“It doesn’t look as if there is a bubble,” Cunliffe said in testimony to lawmakers at Parliament’s Treasury Committee in London yesterday. “The picture emerging is that prices are starting to rise, but we’re still coming back from a relatively low base, and of course it’s a patchy picture because there’s quite a dispersion across the country.”
Strengthening property demand coupled with the government’s decision to accelerate a plan to help homebuyers get loans has raised concerns the property market could overheat. BOE Governor Mark Carney has said fears are overplayed, while the EY Item Club said yesterday that Britain is in the midst of misplaced “hysteria” about housing risks.
In written testimony to the committee, Cunliffe, a civil servant who replaces Paul Tucker on Nov. 1, said lending standards need to be watched closely as the property market recovers to “ensure the system does not become overly exposed to a correction in property prices further down the line.”
He also said recent data suggest there are “upside risks” to the Bank of England’s August forecasts, with surveys pointing to “above-trend growth” in the second half. The BOE will publish new projections for economic growth and inflation next month.
Cunliffe also said that the euro area remains a risk and its recovery is likely to be weak.
“The experience of the past two years has shown how vulnerable the U.K. economic recovery is, given trade and financial links, to the situation in the euro area,” he said in his written testimony.
During the questioning, he said he doesn’t expect a U.S. default, though regulators and banks need to be prepared.
“One of the lessons of 2007-8 is how shocks can be transmitted so quickly,” he said. “Because there’s an expectation that the political system in the U.S. will find a way through this absolutely does not mean that banks and others should not be planning for it.”
Cunliffe’s most recent position was as Britain’s representative to the European Union, where he was involved in negotiations on the region’s banking union. From 2007 to 2011, he was a U.K. government adviser on Europe and global economic issues, and before that worked in a number of roles in the Treasury.
Tucker will leave the BOE this month and become a senior fellow at Harvard University with appointments at both the Harvard Kennedy School in Cambridge, Massachusetts, and Harvard Business School in Boston. He announced his plan to retire on June 14.
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