Bank of England Governor Mark Carney may struggle to cool the housing market next year, with Rightmove Plc predicting asking prices will rise the most in eight years.
London-based economists agree prices will go up, saying the tools the central bank can use may do little to curb housing demand as long as interest rates remain at a record low. The Council of Mortgage Lenders says the average mortgage rate fell to 3.19 percent in the third quarter compared with 6.07 percent in late 2007.
“The BOE has recommended a ladder of alternative things that it could do,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official, who predicts house prices will increase 10 percent in both 2014 and 2015. “All of those tools can buy you some time, but with a market that is susceptible to bubbles, if they keep interest rates at rock-bottom levels, prices will still rise considerably.”
With home values at an all-time high, the Bank of England took action last month to head off a potential bubble by ending Funding for Lending Scheme mortgage incentives. The boom has fueled concern that households are taking on debt they may struggle to afford once interest rates rise. People purchasing a first home are borrowing 3.4 times their annual income on average, matching a record set in August 2007, the CML says.
House prices rose an annual 5.5 percent in October to a record 247,000 pounds ($402,635), the biggest gain for more than three years, the Office for National Statistics said today. On a seasonally adjusted basis, prices jumped 1.4 percent from September.
Prices rose in every region of the U.K. on the year, with values in London surging 12 percent to an average of 437,000 pounds, the data show. Prices paid nationwide by first-time buyers were 5.9 percent higher than in October 2012 at 185,000 pounds.
Rightmove, the biggest U.K. property website, predicts asking prices will rise 8 percent next year. Homebuilding contributed to the fastest economic growth since 2010 in the third quarter, official statistics shows.
House prices will rise 13 percent over the next two years, almost triple the increase forecast in March, the Office for Budget Responsibility said this month. Values, set to rise a faster-than-expected 3.2 percent this year, will increase 5.2 percent in 2014 and 7.2 percent in 2015, with gains averaging 4.1 percent over the following three years, according to the fiscal watchdog.
The Bank of England has pledged to keep its benchmark rate at 0.5 percent at least until unemployment falls to 7 percent, from 7.6 percent currently. Investors are betting the rate will be left unchanged for at least a year, with the implied yield on short-sterling contracts expiring in December 2014 at 0.7 percent at 4:20 p.m. London time. Policy makers say they have the “macro-prudential” tools to curb demand, if needed.
“There’s a variety of ways where we could adjust the terms under which people could get mortgages if we had to,” Carney said in an interview on the “Charlie Rose” show aired on Bloomberg Television this month. “We have measures that we could do. And it’s just like monetary policy. If you do smaller things early enough, you don’t have to do the really big things later on.”
The Financial Policy Committee led by Carney tightened capital requirements on mortgage lending last month and adjusted its Funding for Lending Scheme to exclude stimulus for home loans to combat “evolving risks” to financial stability.
The risks stemming from the housing market are “manageable and are being managed,” Carney told lawmakers in London today. “By acting in a graduated and proportionate way, we are reducing the likelihood that larger interventions will be needed later, and we are allowing the broader economy to continue to receive the stimulus it needs, for as long as its needs, to sustain the recovery.”
Other tools floated by the BOE include making recommendations on underwriting standards, suggesting the government scales back its Help to Buy mortgage program, imposing capital standards and recommending banks limit loan-to-value ratios on home loans.
“It’s good that they’ve been explicit in terms of the options open to them,” said John Zhu, a London-based economist at HSBC Holdings Plc. “They do have the power of regulation, the question is trying to diagnose if, and when, to put them in place and it’s very hard to judge that.”
Evidence from other countries shows macro-prudential measures have had a limited effect, Berenberg’s Wood said. In New Zealand, Reserve Bank Governor Graeme Wheeler introduced limits on low-deposit mortgage lending in October to try to cool the market. The Real Estate Institute of New Zealand’s home-value index rose 1.2 percent to an all-time high in November, according to data released this month.
Low mortgage rates are supporting demand in Canada, where the central bank said the housing market has “shown renewed vigor” this year, even after Finance Minister Jim Flaherty introduced tighter mortgage-lending rules in 2012. Housing has been stronger than the central bank forecast, policy makers said on Dec. 4.
“We are keeping a watchful eye on the U.K. housing market,” said Laura Sarlo, a senior sovereign analyst at Loomis Sayles & Co in Boston. “There are clearly many additional measures that can be tweaked or fine-tuned as the recovery takes hold, so I don’t worry that there’s a shortage of levers. The trickier part is pulling those levers at the right time.”