London House Prices Rise Most Since Before Northern Rock Run

London house prices rose at their fastest pace since just before the panic at Northern Rock Plc marked the start of the financial crisis in the U.K.

Prices in the capital rose 18.7 percent in April from a year earlier, the most since a record 18.8 percent gain in July 2007, the Office for National Statistics said today in London. Across the U.K., prices rose 9.9 percent. A seasonally adjusted 2 percent gain from March was the largest monthly increase since January 2010.

The Bank of England’s Financial Policy Committee is meeting today to consider deploying macroprudential tools to cool the housing market. Governor Mark Carney, who introduced more stringent affordability checks for borrowers in April, says an increase in the key interest rate is the economy’s last line of defense against risks stemming from the property boom.

“While the recently introduced stronger regulations on mortgage lending under the Mortgage Market Review may well have some impact in reducing the risk of an overall housing market bubble developing, the Bank of England will likely want to take further preventative measures –- and sooner rather than later,” Howard Archer, an economist at IHS Global Insight in London, said in a research note.

London house prices rose by 26,000 pounds in April from March to a record 485,000 pounds ($824,000), more than double the 222,000-pound average in other regions, today’s figures showed. The average for the country as a whole was 260,000 pounds. Prices paid by first-time buyers climbed 10.7 percent on the year.

‘Vulnerable Position’

Excluding London and its commuter area in the southeast of England, house prices rose an annual 6.3 percent, the most since June 2010. The figures don’t reflect activity since the new MMR rules took effect on April 26. The new mortgage regime has lengthened the time needed to obtain a loan.

Carney said last week that levels of mortgage indebtedness have created a “vulnerable position” for the U.K. economy. Household debt is about 140 percent of disposable income, mortgages at high loan-to-income ratios are at a record and he said there are signs of a “concerning” drop in underwriting standards.

With the economy gaining momentum, officials are preparing to embark on their first rate increases from the current record-low 0.5 percent. The “gradual and limited” pace of tightening will help ease the strain of higher borrowing costs, Carney has said.

Help to Buy

The bank’s commitment to prevent the housing market overheating, along with the government’s insistence on maintaining a program to help buyers with small down payments onto the housing ladder, heap pressure on the FPC to intervene. The Organization for Economic Cooperation and Development has raised concern about the efficacy of these tools as they’re untested.

“Given where the Bank of England is, given the Help to Buy program the government still has in place, given the fact that the housing market is overheating more than the economy as a whole, they have to at least try the macroprudential tools before they do a big interest-rate rise,” Adam Posen, president of the Peterson Institute for International Economics and a former BOE policy maker, said on Bloomberg Television yesterday.

Northern Rock was the first U.K. victim of the global financial crisis. In September 2007, the government was forced to sieze control and later nationalize the lender after it became the first British bank to suffer a run on deposits since 1866.

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