Posen Says U.K. House Price Bubble May Fuel Crisis in Sterling

Former Bank of England policy maker Adam Posen said the U.K. government’s program to aid first-time home buyers may be fueling a bubble in prices that could provoke a crisis in the pound.

“I definitely see the potential” for a sterling crisis, Posen said on Bloomberg Television’s “The Pulse” with Guy Johnson. “Sterling’s going to be up but I fear it’s going to be as temporary as the housing-price boost from Help to Buy.”

Chancellor of the Exchequer George Osborne has asked the BOE’s Financial Policy Committee to report in September on the risks posed by his Help-to-Buy program amid criticism it’s over-stimulating the property market. Posen, who stepped down in 2012 after three years on the BOE’s Monetary Policy Committee, said the FPC needs to take action now.

“Where the hell is the FPC, which should be countering this and they said they’re not going to touch it for another year,” he said. “This is just repeating the run up -- the bubble of asset prices, in housing in the U.K. that we saw in the early crisis years -- and I don’t quite see the point since it’s not turning into increased supply.”

The Royal Institution of Chartered Surveyors said this month its house-price index rose to the highest in more than a decade in October. BOE Governor Mark Carney will present the bank’s quarterly Financial Stability Report in London on Nov. 28 after saying earlier this month that “clearly there are areas in the country where valuations are very elevated.”

Not Sustainable

The pound has risen about 7.3 percent against the dollar in the past six months. It’s advanced 6.7 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

For Posen, who is now president of the Peterson Institute for International Economics in Washington, U.K. growth will temporarily “surprise on the upside, so that’s all bullish for sterling.” While a crisis in the pound isn’t “locked and loaded,” there is the potential for one, according to Posen.

“I don’t view this as a sustainable recovery, I view 1-1.5 percent of the growth rate as relying on fundamentals and the rest of it being this bubble,” he said.

Asked how long this could continue, Posen said, “If we’ve got enough oligarchs and people fleeing, wanting to get their money out of unstable governments, they want to buy real estate in London, it could last for a while.”

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