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Loan caps reduce risk of crash, says Bank deputy: Household debt

July 4, 2014

Julia Kollewe

High household debt is a key risk to the recovery, the Bank of England deputy governor Sir Jon Cunliffe has warned, saying the Bank's measures to rein in the housing market should be thought of as insurance against a major crash.

In a speech at the International Festival for Business in Liverpool, Cunliffe said UK household debt was equal to 135% of household earnings, compared with 110% in 2000, although it reached 165% in the runup to the financial crisis. The level was higher than in other European countries and on a par with the US, he said.

Last week, the Bank's financial policy committee (FPC) laid out the first limits on the mortgage market in 30 years, to limit risky lending. Lenders must check that mortgage applicants can cope with a rise of three percentage points in interest rates, and from October there will be a 15% cap on the number of mortgages that banks and building societies can give to people who want to borrow more than 4.5 times their income.

Cunliffe, in charge of financial stability at the central bank, said the main risk from the housing market was that house prices would continue to grow strongly and faster than earnings and lead to more household debt.

"The stress test of the major UK banks towards the end of the year will assess the resilience of the system to a major crash," he said.

"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."

His comments came after figures from Nationwide, Britain's biggest building society, showed that the average price of a property in London had risen by more than a quarter, to pounds 400,404, over the past year, a rate of growth not seen since the summer of 1987.

The International Monetary Fund has told the government that rapidly growing house prices are the biggest threat to the UK's economic recovery.

Julia Kollewe

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Source: Guardian (UK)

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