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BOE Tools to Tame U.K. Homes Market May Not Work, OECD Says

Properties Stand in the Worcester Park District of London
Further BOE measures to control property values should be considered, with prices “significantly” exceeding long-term averages relative to rents and incomes, the OECD said. Photographer: Simon Dawson/Bloomberg

The Bank of England’s tools to prevent the housing market from overheating may not work, the Organization for Economic Cooperation and Development said as a former BOE official called for steps to cool values in London.

“There is a downside risk that micro-prudential and macro-prudential policies are ineffective in containing the housing market, resulting in overheating,” the Paris-based group said in a report today. Government plans to allow people to cash in their pension savings instead of buying a lifetime income from an insurance company “could further stimulate household spending, property demand and house price inflation,” it said.

Further BOE measures to control property values should be considered, with prices “significantly” exceeding long-term averages relative to rents and incomes, the OECD said. The group raised its 2014 economic growth forecast for the U.K. to 3.2 percent from the 2.4 percent it projected in November. In 2015, output will grow 2.7 percent instead of 2.5 percent, it said.

Charles Goodhart, a founding member of the BOE’s interest rate-setting Monetary Policy Committee, said that fiscal measures such as a land tax are needed to restrain the housing market in London, where cash-rich foreign buyers are helping to drive up values.

“There is a specific problem in London about people bringing money from abroad,” he told a Fathom Consulting event in London today. “I think the London issue can only be handled essentially by some kind of fiscal measure because foreigners on the whole do not borrow mortgages from British banks.”

Services Boom

He also said the government should consider lowering the 600,000-pound ($1 million) threshold for purchasing properties under its Help to Buy program, which provides state-backed loan guarantees to help people with minimal deposits get onto the housing ladder.

In a separate report today, Markit Economics said U.K. services grew at the fastest pace in four months in April, with its purchasing-management index rising to 58.7 from 57.6 in March. The pound rose 0.6 percent to $1.6967 as of 12:38 p.m. after trading as high as $1.6979, the highest since August 2009. It strengthened to 82.13 pence per euro.

The BOE will vote to raise the benchmark interest rate from the current record-low 0.5 percent around the middle of next year, the OECD said. Growth will be sustained by household spending and a pickup in business investment, and overall risks to the U.K. economy are broadly balanced, it added.

“Interest-rate normalization could have a stronger-than-expected impact on balance sheets owing to high levels of indebtedness,” the OECD said. On the upside, stronger business investment may mean “wages could pick up in line with stronger productivity, which would support household incomes and living standards.”

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