News Column

Dampening rate of house price rises

June 27, 2014

It is in danger of happening again. The spectre of a house price boom, followed by economic bust, was invoked yesterday by the Governor of the Bank of England, Mark Carney, as he announced measures to try to dampen property fever. High loan-to-income mortgage lending has risen to a record high and the trend is likely to continue, he said; responsible lending could promptly turn to recklessness; with high levels of debt, households are more likely to struggle to meet their mortgage payments. Something has to be done.

Yet is that something enough? The Bank's Financial Policy Committee has made use of new powers and decreed that loans of 4.5 times a borrower's income or higher should account for no more than 15% of new mortgages issued by lenders.

Restricting the proportion of such loans is a sensible move, but how effective will it be in preventing overheating of the housing market?

It is expected that most of these loans will be issued in the south east of England, where two-thirds of such high-end lending takes place, but that does not mean that lenders in Scotland, for instance, may not also continue to approve the loans. There is still room for a great deal of expansion in the number of such loans, as they account for only 10% of the market at present, and there are no restrictions on lending of larger-than-average loans of up to 4.5 times a borrower's income.

Earlier this month, Business Secretary Vince Cable confessed to being appalled that some lenders were lending five times a borrower's salary and identified three to 3.5 times salary as a much more sustainable level. This seems eminently sensible, yet the Bank's pronouncement leaves lenders free to continue issuing much bigger, and therefore riskier, loans at a time when wages are still catching up with inflation (or not) after years in the doldrums.

Perhaps the Bank's other new policy, an "interest rate stress test" to ensure borrowers can keep up their mortgage repayments if interest rates rise by 3%, will protect against defaulting; it is certainly welcome. But rising interest rates are not the only potential cause of overstretch in household incomes. A job loss, illness or unforeseen expense can also cause difficulties and the heftier the mortage to begin with, the greater the potential crisis.

The bottom line is that house prices are once again too high. Across the UK, they have jumped 10% in a year. While London is a law unto itself, hefty price inflation has also been seen in Edinburgh and Aberdeen.

It is to be hoped the Bank's words will themselves dampen the mood and help bring restraint to the market, but the Governor of the Bank of England cannot single handedly shield the British economy from the flames of this conflagration in the making. More homes are needed; more brownfield sites must be brought into use. Without more housebuilding to meet growing demand, house prices will continue to spiral no matter what the Bank says, and the British economy will once more fall victim to an overheated housing market.


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Source: Herald, The (Scotland)


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