An expected pickup in property-price growth and an expanding buy-to-let mortgage market aren’t undermining U.K. financial stability, the Bank of England said.
House-price inflation is set to accelerate as sales volumes increase and mortgage-rate spreads fall to the lowest in seven years, the BOE’s Financial Policy Committee said in a quarterly statement on Friday. And growth in buy-to-let mortgages, whose outstanding value has risen 40 percent since 2008, doesn’t require immediate action.
The report indicates officials are counting on existing government and central bank measures to prevent excessive leverage. Borrowing by landlords has helped drive house prices 4.6 percent higher in the year through July, in contrast to wage gains of just 2.9 percent.
“While house prices are recovering quite strongly, it’s not really enough to see households overleveraging themselves and creating a financial-stability risk,” said Chris Hare, an economist at Investec Securities in London and a former central bank official. “The bank, if it wanted to, could clamp down on demand but it’s decided it doesn’t want to do that at the moment.”
The FPC’s approval of the current state of the housing market also includes the government’s Help to Buy program, which helps enable purchases with a down payment of as little as 5 percent. The BOE’s second annual review of the plan found that it presented no financial stability risks at present.
For owner-occupiers, regulators have introduced affordability tests and limited the riskiest loans to prevent a mortgage-lending bubble in the U.K. There’s still a need for the lending caps introduced last year, the BOE said. These required that no more than 15 percent of new mortgages could exceed a loan-to-income ratio of 4.5.
In the buy-to-let market, there’s “no immediate case for action,” the FPC said, noting that budget changes that will cut tax relief for landlords will reduce the incentive to take on leverage. Officials are “alert to the rapid growth of the market and potential developments in underwriting standards”
Turning its attention to broader risks, the FPC said the outlook for financial stability “remains challenging” and that “downside risks have risen” while those from the global environment “have increased.”
“These risks come from both China and emerging market economies more broadly,” the statement said, noting that concerns in relation to Greece and the euro area had fallen since July.
Officials also asked for more work to be done on market liquidity, including dealers’ ability to act as intermediaries in markets, contagion and investment funds.
The panel had asked in March for an assessment of liquidity, when it noted that it had become more fragile so that relatively modest news could trigger a sudden change in conditions.
Since then, global markets have been roiled by China’s slowdown and strains in other emerging economies. The ructions were enough to stay the hand of the U.S. Federal Reserve from implementing its first liftoff from record-low policy rates earlier this month.