Bank of England Governor Mark Carney shifted closer to reining in surging U.K. home prices by branding them the No. 1 risk to the economy and listing potential policy responses.
In his most forthright warning yet over the property market, Carney said policy makers “could do more” to tackle excesses if needed. Options include imposing more checks on the affordability of mortgages, limiting types of loans or advising the government to rein in its stimulus program. His comments came as data showed housing continued to strengthen this month, with prices rising to a record.
“All those things are possibilities and we will consider them all,” Carney said in an interview on Sky News yesterday. “The biggest risk to financial stability, and therefore to the durability of the expansion, those risks center in the housing market and that’s why we are focused on that.”
Just four weeks before the Carney-helmed Financial Policy Committee convenes to assess the housing boom, it received fresh incentive to act, with Rightmove reporting prices rose 3.6 percent across England and Wales this month, propelling prices to an all-time high of 272,003 pounds ($457,700).
Housing is the Bank of England’s most significant domestic concern now that the economy is improving and inflation is under control. BOE Deputy Governor Jon Cunliffe said earlier this month that it is “dangerous” to ignore the momentum.
Among other risks, Carney said the strength of the pound is creating “real challenges” for both exporters and the balance of the U.K. expansion, while he warned recent low volatility in financial markets could eventually adjust sharply.
Sterling has appreciated more than 10 percent against the dollar in the past year and reached $1.6996 this month, the highest level in almost five years.
Britain’s housing market is being fueled by an improving economy, record-low borrowing costs and government incentives. London is leading the surge, with an annual gain of more than 16 percent. Rightmove director Miles Shipside said the capital needs a “mammoth” building program to boost supply.
Carney’s analysis that there are “deep, deep” structural problems in the form of weak housing supply across the U.K. was echoed across the political spectrum, albeit with clashes over how much the government is doing.
Also speaking on Sky News, Prime Minister David Cameron said “fundamentally we need to build more homes” and that his government is encouraging that. Deputy Prime Minister Nick Clegg said on BBC Television that the government should “pare back” its Help to Buy stimulus if Carney advised doing so.
Ed Balls, Labour Party Treasury spokesman, said the government should do more to spur building, as well as reduce the top value of homes that can be purchased under Help to Buy. He said that unless the government acts, there is a danger the BOE “will be forced to raise interest rates prematurely.”
The central bank needs to ensure that lenders are strong enough to make loans and that mortgages are loaned to borrowers that can afford them, Carney said in the interview. The gain in prices is broadening and may also be fueling the need for large mortgages of more than four times borrowers’ salaries, he said.
“We would be concerned if there were a rapid increase in high loan-to-value mortgages across the banks,” he said. “If that were much more generalized and particularly if it were accompanied by very high loan to income ratios, we’ve seen that creeping up and it’s something we’re watching closely.”
Affordability tests came into force in the U.K. last month, requiring borrowers to prove they can afford repayments even when interest rates rise. After its March meeting, the FPC said a tool to make the tests more stringent will be available as soon as June. The BOE could also recommend the government curtails Help to Buy, which allows for house purchases with a down payment of as little as 5 percent.
“It’s a pretty targeted program, it’s a relatively small program at this point but it could grow a lot and it could change attitudes in other parts of the mortgage market, that’s why we have to be vigilant,” Carney said.
Policy makers wanted to avoid the “build up another big debt overhang that is going to hurt individuals and is very much going to slow the economy in the medium term,” he said.
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