- Brazier tells property investors the BOE is `watching'
- Sees potential stability risks from illiquid property funds
Bank of England policy maker Alex Brazier said officials are keeping a close watch on property investors’ debt levels to ensure there isn’t a buildup of risks that could undermine financial stability.
“This year we found loan-to-value ratios rising and interest cover ratios falling, but from a very conservative starting point,” Brazier, the central bank’s Executive Director for Financial Stability Strategy and Risk, said in remarks to be delivered in London on Monday. “We’ll keep watching this.”
At the black-tie “Property Investor’s Banquet” in London’s financial district, Brazier said financial resilience isn’t just about banks, but also about the strength of borrowers’ balance sheets. He also said that while diverse sources of funding are important, the BOE will make sure this doesn’t become an avenue that allows standards to slip.
“We know that the importance of major U.K. lenders in financing you has almost halved since the crisis,” said Brazier, who is also a member of the BOE’s Financial Policy Committee. “While that diversity should be welcome -- it should be a source of strength -- it can be a source of weakness if it simply moves gearing into a shadow on our radar screen. It’s essential that our radar technology keeps up.”
Brazier praised the industry for a proposal that would see debt measured not relative to market prices, but to cash-flow prospects. That would help to prevent debt “running away unsustainably” as prices rise during good times, he said.
Brazier also noted the potential for new risks to emerge. The BOE and the Financial Conduct Authority are examining ways that illiquid funds could contribute to broader economic instability, Brazier said. Open-ended property funds, which now have 80 percent more assets under management than they did before the financial crisis, can amplify price falls as investors seek to redeem their holdings at short notice, he said.