BOE’s Cunliffe Says Low Rates Raise Risk of Debt Buildup

Bank of England Deputy Governor Jon Cunliffe said low borrowing costs may hide the real cost of Britons’ mortgage burden and increase the risk of a buildup in household debt that could threaten financial stability.

“The main risk we see arising from the housing market is the risk that house prices continue to grow strongly and faster than earnings” and this “leads to higher and more concentrated household indebtedness,” Cunliffe said in a speech today in Liverpool, England. “This risk is greater at a time of exceptionally low interest rates which may well mask the likely true cost of a mortgage over time.”

Cunliffe’s comments follow moves by the central bank’s Financial Policy Committee last week to limit the number of high loan-to-income mortgages. Governor Mark Carney said at the time debt prospects were a concern and officials were at the “limit of our tolerance.”

“The FPC has acted in advance to identify and to protect against a very major risk to the financial system and the economy,” said Cunliffe, who is in charge of financial stability at the BOE. “The steps taken last week are insurance against the possibility of a sustained boom in the housing market leading to a substantial increase and concentration in household debt that could make a crash more likely and more severe.”

Speaking earlier on BBC Radio, Cunliffe said the surging market is the biggest risk to the recovery and it’s not just London that’s the threat.

London Surge

While home prices in the capital surged an annual 26 percent in the second quarter, more than twice the national average, Cunliffe said this is “not just an issue about London” and there’s a risk a buildup of mortgage debt will destabilize the economy.

“House prices have been growing strongly in the country as a whole for the last year,” Cunliffe said in the interview. “The momentum is there, the growth is there. The risk here is that if that continues to happen, and if the only way people can afford to buy houses is to buy with mortgages that are more and more times their income, then we get this debt risk.”

Nationwide Building Society said yesterday that house prices in the U.K. rose 2.9 percent in the second quarter from the previous three months, with values in London up 7.6 percent.

There have been some signs of a slowdown in the property market after new affordability tests for borrowers were introduced earlier this year and Carney began warning about interest-rate increases. The BOE’s benchmark rate has been at a record-low 0.5 percent since March 2009.

Cunliffe said while the economy is strengthening, rate increases would not be as steep as in the past.

“When interest rates start to go up to more normal levels from the extraordinary low levels they’re at the moment, we think the pace of that is going to be gentler than it’s been in the past,” he said. “The level to which interest rates will rise will be lower.”

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