Hair-of-Dog Policy Risks U.K. Housing Boom Repeat, Turner Says

Britain risks repeating the debt-fueled binge that led to the credit crisis as the government relies on a hair-of-the-dog remedy for the economy, said former Financial Services Authority Chairman Adair Turner.

“We had a fantastic party, we got a whacking great hangover, and we’ve decided that the best cure is a really stiff drink,” Turner said in an interview in Singapore on Oct. 25. “Which is the same all over again -- get the housing market going again.”

House prices in England and Wales rose 3.1 percent from a year earlier, the biggest gain since 2007, Hometrack Ltd. said today. The report adds to evidence that Chancellor of the Exchequer George Osborne’s Help to Buy program is stoking the property market.

Turner added his voice to critics including the opposition Labour Party and the International Monetary Fund who say the initiative, which cuts deposit requirements for people wanting to get onto the property ladder, could fuel another property bubble. In London, prices are soaring amid demand from cash-rich international buyers.

“We now have an incredibly frothy central London and wider London market and an increasingly buoyant across-the-economy market,” he said. “It’s that increasingly buoyant across-the-economy market that we have to watch carefully and make sure that we don’t allow it to go from reasonable buoyancy to excess.”

Price Boom

Despite government pledges to rebalance the economy away from consumer spending and the housing market, “we now seem to be having a recovery which is heavily focused on that favorite old British activity, which is another house price boom,” he said. “That’s not a sustainable, balanced economy.”

Turner, who took over the chairmanship of the FSA a week after the collapse of Lehman Brothers Holdings Inc. in September 2008, said the housing market needs to be watched “very, very carefully” as “the economy has got going again because we’ve thrown at it a whole load of policy stimulus.”

Help to buy allows people to buy homes costing up to 600,000 pounds ($970,000) with a 5 percent deposit. The program began in April with interest-free loans for buyers of newly built properties and the second phase -- mortgage guarantees covering all homes -- was brought forward to this month from January.

“Do I worry that we are encouraging people to take out 95 percent mortgages? Yes I do,” Turner said. “There is a danger that we encourage people to take out mortgages that look fine as long as we have currently low interest rates but if interest rates return to normal in 5 or 7 years’ time, to 5 or 7 percent -- some people will find these difficult mortgages to service and that’s problematic.”

Widening Gap

House prices in England and Wales rose 0.5 percent this month, the same pace as in September, Hometrack said. The gains were the fastest since May 2007. Values in London jumped 0.8 percent.

The gap between supply and demand widened further in October, Hometrack said. The number of new buyers registering with real-estate agents rose 2 percent from a month earlier, while the volume of property listings fell 1.6 percent. House prices rose in all regions except the northeast, it said.

“Talk of a national bubble is overdone but could start to impact on market sentiment and the willingness of buyers to pay higher prices,” Hometrack said.

The U.K. economy grew 0.8 percent in the third quarter, its fastest pace for more than three years, government data on Oct. 25 showed. Services companies from architects to engineers accounted for three quarters of the increase, underlining the effect the housing-market recovery is having on growth.