Bank of England official David Miles said policy makers will only use interest rates as a last resort to cool Britain’s housing market if it begins to overheat.
“We do have, as the last line of defense, the blunt instrument, the big stick of interest rates,” Miles said today in a Bloomberg Television interview with Guy Johnson in London. “If you did get into a situation where the tools that the Financial Policy Committee have seem not up to the job of stopping overheating in the housing market, we would then turn to the blunter instrument of using bank rate. We’re a long way from that.”
U.K. house prices have surged in the past year, prompting concerns that the market may be heading toward another bubble. The FPC, created to ensure financial stability after the last crisis, has responded by removing a mortgage aid in its Funding for Lending Scheme. Miles, a member of the Monetary Policy Committee since 2009, doesn’t sit on the FPC.
“The Financial Policy Committee is the first line of defense against the risk that the housing market generally starts to overheat,” Miles said. Its tools “are likely to be really powerful and likely to prove effective.”
Miles said price gains in the broader U.K. housing market aren’t yet rising at a unsustainable pace and the market is being skewed by demand in London.
Rightmove Plc (RMV) said today that asking prices in the capital jumped 5.2 percent to an average 541,313 pounds ($905,000) this month from January. That helped push national values up an annual 6.9 percent, the biggest increase since 2007.
“In terms of a generalized overheating housing market, I don’t think that’s a good description of where we are,” Miles said. “We’re in a situation where the national figures for house prices are substantially influenced by the south east, London.”
The EY Item Club said this month that London’s housing market is beginning to show “bubble-like conditions.” The Institute for Fiscal Studies says the government’s Help to Buy program to aid first-time purchasers get on the property ladder risks driving prices higher.
“Net mortgage lending remains at extremely low levels, lower than you might expect in a well-functioning market,” Miles said. “At some point, it would be likely and indeed desirable that net mortgage lending moved up from current levels. I don’t have great confidence in my ability to say when that might happen.”
Miles said he would become more concerned if expectations for house-price gains became entrenched and fueled rapid growth in mortgage lending.
It’s “important that there is a clear recognition by borrowers and lenders that interest rates will not remain at this level for many years to come,” Miles said. “They need to think very carefully what’s going to happen when the cost of that mortgage moves up.”
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