BOE’s Weale Says He’s Concerned About U.K. House-Price Buoyancy

Bank of England policy maker Martin Weale said he’s concerned about recent signs of “buoyancy” in the property market and borrowers must make sure they can still afford repayments when borrowing costs rise.

“House prices are elevated,” Weale said in testimony to Parliament’s Treasury Committee in London today. “People who are taking on mortgage debt do need to be sure that they can afford to look after it even if interest rates return to what we regard as more normal levels.”

Strengthening housing demand coupled with the government’s decision to accelerate its Help to Buy program, which aids homebuyers in getting loans, has raised concerns the property market may overheat. Jon Cunliffe, who will join the BOE as deputy governor for financial stability next month, said yesterday that while the U.K. isn’t in a bubble, the property market will need to be monitored “very carefully.”

In the hearing, Weale also said the BOE’s forward guidance, introduced in August, may undermine its inflation-targeting credentials. Under guidance, the central bank has said it won’t raise its benchmark interest rate from a record low at least until unemployment falls to 7 percent. Weale voted against the policy, favoring a tougher stance on inflation, though he’s agreed to work within its framework.

“The policy of forward guidance if not carefully designed can have the effect of raising inflation expectations and obviously we were all concerned that that shouldn’t happen,” Weale said. “There seemed to me the risk that that could itself lead to a rise in inflationary expectations,” he said. “My concerns remain.”

Inflation Target

Data today showed inflation unexpectedly remained at 2.7 percent in September, above the BOE’s 2 percent target. The median forecast in a Bloomberg News survey was 2.6 percent.

“I think probably the most likely outcome is that inflation does gradually fall back to target, but were there a new inflation shock then of course the issue would become of greater prominence,” Weale said.

In written testimony to the committee, Weale said that turmoil emanating from the euro-area debt crisis remains the largest risk to the U.K. economy.

He also said there is a risk that the government’s Help to Buy program could “add to demand while supply is weak, leading to increased pressure on prices.”

“I am concerned about the recent buoyancy of house prices, although relative to incomes, we’re lower than during the peak,” Weale told lawmakers. “To some extent I think the elevation of house prices is something you would expect with very low interest rates,” and “what will happen when interest rates return to normal levels we don’t know.”

Debt Risk

The Royal Institution of Chartered Surveyors said on Oct. 8 that its house-price index rose to the highest in more than a decade last month. BOE Governor Mark Carney has said fears of a bubble are overplayed as the market is recovering from a low level of activity.

Cunliffe said yesterday that if Help to Buy led to “households becoming overexposed because they can now borrow higher amounts, there is a possibility” it may pose a risk to the banking system. “That’s one of the reasons it’s necessary to keep a very firm eye on the lending standards that lenders use,” he said.

The program could also contribute to house prices “going up at an unsustainable rate” and pose a risk to financial stability, the deputy-governor designate said.

Before it's here, it's on the Bloomberg Terminal.