The Bank of England’s governor, Mark Carney, has reinforced his ominous forecasts concerning the UK housing market, as new data indicated that house prices rose by 10.5% in the 12 months to May.
Speaking to the Treasury Select Committee on Tuesday 15th July, Carney identified rising house prices and, in particular, high levels of debt due to mortgage payment struggles as the ìbiggest riskî to economic stability in the not-distant future.
Shedding light on the Bankís Financial Policy Committeeís move to crack down on the number of high loan to income mortgages offered out by lenders, Carney stressed that a sharp increase in the number of indebted homes could send the economy back into recession.
The governor noted that although the British public appear to harbour a collective commitment to paying back their mortgages, low-income families have to reduce spending in other areas to do so. This reduction in spending is exacerbated by escalating house prices and as such a domino effect is created whereby, through their enduring obligation to paying off their mortgage, British people inadvertently cause holes in the economy elsewhere, he argued.
Carney explained: ìWhat we were trying to address was the indirect risk from indebtedness … and the macroeconomic consequences of that. Because history shows British people pay their mortgages, there are very low default rates on mortgages. What happens if households are borrowing at high multiples is they have to economise on everything else in order to pay their mortgages.
“And if enough people are highly indebted, that has a big macroeconomic impact. It can tilt the economy back into recession, and we start from a position of vulnerability. There is the possibility that currently responsible lending standards become irresponsible to reckless.î
In order for the Bank to securely fortify against a sudden rise in high loan to income mortgages, Carney indicated that restrictions imposed on lenders were essential. The FPCís decision to prohibit lenders from giving out no more than 15% of their mortgages to borrowers, whoíre seeking to obtain loans four-and-half times their income, is in keeping with Carneyís remarks earlier this month which called for a ìgraduated and proportionateî response.
ONS Statistics Significance
Carneyís comments came in the wake of the discharge of fresh figures by the Office of National Statistics (ONS), which displayed the worryingly rapid manner in which house prices, especially within the capital, are rocketing upwards.
ï The average house price paid by first time buyers stands at over £200,000 for the first time.
ï The average price of a property within the capital is £492,000 – £8,000 short of the 4% Stamp Duty limit.
ï The annual rate of inflation stood at its peak amount to 10.5%.
ï Once price increases in London/South East are factored out, the ONS said annual rate of inflation was a relatively meagre 6.5%
ï The ONS figures showed that during the year to May, average house prices increased by 11% in England, 6.5% in Wales and 3.6% in Scotland but fell 0.7% in Northern Ireland.
Duncan Stott, director of PricedOut, the campaign for reasonably priced houses, said: “It is crazy that ordinary working people are having to pay so much for something as fundamental in life as a home. With over £200,000 needed to secure a first home, young people will now be saying, ‘enough is enough’.
“The housing market is the biggest threat to economic stability, so it is simply reckless of the government to allow house prices to rampage so far out of reach. We need urgent action to bring an end to rising house prices.”
There is a growing feeling of unsettlement across the UK; people want their anxiety assuaged and fast ñ can Carney prove himself the man for the job?