BOE’s Miles Says Alarm Bells Aren’t Ringing in Housing Market

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David Miles
David Miles, monetary policy committee member at the Bank of England. Photographer: Simon Dawson/Bloomberg

Bank of England policy maker David Miles denied the U.K. housing market is growing unsustainably, saying it was “absolutely on its knees” when he joined the rate-setting panel more than six years ago.

“I’m not sure that the alarm bells are so clearly ringing in the U.K.,” he said in an interview Monday weeks before his second and final term on the Monetary Policy Committee ends. New regulations and other improvements mean “the risk of all this playing out badly is much lower now than at any time in the past for the U.K.”

The financial crisis had decimated transactions, new mortgage approvals and prices in residential property. Now, transactions and approvals have rallied while values are rising “fairly steadily” across much of the country, Miles said. House prices have risen by about 6 percent over the past year, half the annual pace seen in mid-2014, government data show.

“The willingness of lenders to lend is certainly dramatically different from what it was in the first half of 2009, and mortgage rates have come down really very significantly,” Miles said, speaking in his office at the BOE. “It’s a very different picture from what it was back then.”

Miles joined the BOE as a part-time member of the MPC, bringing a particular expertise in the housing market. His first meeting was in June 2009, shortly after the bank started its unprecedented quantitative-easing program and cut the key rate to 5 percent, where it remains today.

Gradual Pace

The sensitivity of borrowers to changes in interest rates reinforces the case for a “gradual” pace of tightening, Miles said. The British housing market is based on shorter-term fixed-rate loans and a higher proportion of adjustable rates than in the U.S., where sharp policy moves by the Federal Reserve won’t have as “dramatic” an impact on debt affordability.

“That’s not the case in the U.K., where it really has a big impact very quickly,” he said. “That’s why gradualism is crucial, and those are the considerations that have been playing in my mind over recent meetings” as the time for raising rates approaches.’’

The risk of borrowers overextending themselves because of record-low interest rates will be mitigated by rules introduced last year that made it harder to get a home loan and the continued oversight of the Financial Policy Committee, which capped the proportion of mortgages banks can advance at high loan-to-income ratios, Miles said. Still, the shortage of homes in Britain isn’t something that the MPC or the FPC can tackle.

In London, property prices have surged 70 percent since early 2009, and are almost double the national average at about 500,000 pounds ($780,000). They grew 4.7 percent in May from a year earlier, the latest official figures show.

London Market

Miles said that the housing market in the capital is “unusual,” in part because the environment for the most expensive properties is somewhat immune to U.K. monetary policy. Still, that market has moved away from some of its excesses, such as annual rates of growth last year that were around 18 percent.

“London now seems not quite so different from the rest of the U.K.,” he said. “The U.K. as a whole was at a much lower level, and I think that difference in the heat of the London housing market relative to the rest of the U.K. is lower now than it was back then.”

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