No Housing Bubble Seen by Treasury as BOE Poised to Act

As Britons brace for the Bank of England to announce steps to restrain the housing market this week, the No. 2 at the U.K. Treasury dismisses talk of a bubble.

“People shouldn’t get carried away with the scale of the problem,” Chief Secretary to the Treasury Danny Alexander said in an interview at Bloomberg LP’s New York headquarters yesterday. “It’s localized” in London and southeast England, he said. “Across the rest of the U.K. you have seen rises in property prices but they’re at a much more subdued level.”

The comments come amid investor expectations that BOE financial-stability officials will outline action to stop households taking on levels of debt that could threaten the economy. The Financial Policy Committee met on June 17 and its decisions will be made public when the BOE publishes its twice-yearly Financial Stability Report on June 26.

“The committee is expected to have come to the view that acting now to curb risks of financial instability is a prudent course of action,” said Sam Hill, senior U.K. economist at RBC Capital Markets in London.

Pressure to act has mounted as rising house prices stretch affordability, with first-time buyers in London now borrowing 200,000 pounds ($341,000) on average, almost four times their gross income. Chancellor of the Exchequer George Osborne acknowledged the risks when he proposed this month giving the FPC direct powers to limit the amount homebuyers can borrow.

Recovery Threat

BOE Governor Mark Carney says household indebtedness, at about 140 percent of gross disposable income, leaves Britain vulnerable and that macro-prudential tools, rather than interest rates, should be deployed first if financial stability is at risk.

In the U.S., the debt-to-GDI ratio was 109 percent in 2012, according to the latest estimates from the Organization for Economic Cooperation and Development. It was 87 percent in Germany.

Government data last week showed home prices rose 9.9 percent in April from a year earlier, the most in four years, and by almost 20 percent in London.

Rising prices are spurring an economy set to grow at its fastest pace since 2007. That’s led BOE officials to warn that the benchmark interest rate could go up as early as this year. Investors are fully pricing in a quarter-point increase to 0.75 percent by February, according to derivatives trading.

‘Edging Closer’

“As the economy progresses, the time to normalize interest rates is edging closer,” Carney told lawmakers in the House of Commons today. “What’s most relevant is our view that those adjustments will be to a level of interest rates, through a gradual process, that’s likely to be materially lower than historic averages.”

Options for the FPC, which is led by Carney, included toughening affordability tests and making banks hold more capital against mortgage lending. Officials can also recommend putting limits on loan-to-income or loan-to-value ratios -- an outcome seen as the most likely by Hill at RBC -- and urge changes to Help to Buy, a government program for people with small down payments.

“We’ve equipped the BOE with very substantial new powers to manage and address” risks stemming from the housing market, said Alexander. “Of course if they recommend changes, then those changes should be followed through.”

Carney will hold a press conference in London at 10:30 a.m. on Thursday when the Financial Stability Report is published.

Balanced Judgment

Alexander said that, adjusted for inflation, U.K. house prices remain below their level in 2007, with average values outside London and the southeast rising at about 6 percent a year.

“Action that ends up suppressing the housing market across the rest of the U.K. -- that could cause a difficulty for our recovery,” he said. “It’s quite a balanced set of judgments that need to be made.”

He also denied Help to Buy is contributing to pressure on prices, saying the average value of a home bought under the program is about 150,000 pounds -- compared with a national average of 260,000 pounds and 485,000 pounds in London -- and almost all purchases are outside the capital.

Instead, homebuilding in the U.K. needs to double to about 300,000 units a year, he said.

In a survey published yesterday, the Bank of England said mortgage demand increased “significantly” this quarter, though new rules to ensure borrowers can meet repayments over the long-term were having an effect. That trend was reinforced by industry data today showing mortgage approvals fell for a fourth month in May.

“I’m confident the Bank of England has all the powers that it needs to take appropriate action,” Alexander said.

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