The UKís rapidly growing housing market could be set to crash in the near future, the Bank of England has identified in its most stark and worrying warning yet about the potential effects of having an extended period of soaring property prices.
Sir Jon Cunliffe, the Bankís deputy governor for financial stability, has argued that if policymakers continue to neglect the rate in which house prices are rising and demand is growing, then the UK would be at a huge risk of a fresh crash occurring that would undo the staggering revival that the property sector has undergone in the past 12 months.
The news comes on the same day that official figures were released that indicated that 1 in 15 properties in London are now being sold for a price of over £1 million, with Cunliffe highlighting that historically a price boom in the UK tends to result in a crash soon after.
“This is a movie that has been seen more than once in the UK,” he said.
The deputy governor also voiced his concern about the financial condition that many mortgage holders will find themselves in when interest rates are eventually raised by the Bank of England from their historic low of 0.5%, particularly those who have simply capitalised on the cheap borrowing costs that come along with large loans at present and have not planned their finances in advance to deal with higher monthly outgoings when the interest rises on their mortgages.
“The growing momentum in the market is now in my view the brightest light on that dashboard”, Cunliffe said.
“It has not yet been accompanied by a substantial increase in aggregate mortgage debt, though gross mortgage lending is growing and there are signs that debts are becoming more concentrated.”
Cunliffe did concede that the new lending regulations imposed last week could have a positive impact on the housing market, by filtering down demand to those who can actually afford to pay mortgage costs on a long term basis, but also highlighted that a number of outcomes are possible and that policymakers will need to stay alert in order to prevent a crash occurring in the next few years.
“But other outcomes are very possible and the financial policy committee [FPC] will need be both vigilant and ready to act.”
The primary danger that Cunliffe is wary of is “a major overshoot in prices and build-up in debt followed by a sharp correction with negative equity and an overhang of debt for many households”.
The FPC was first created by Chancellor George Osborne in order to minimise the chance of a new asset bubble occurring that would undermine the UKís economic recovery. As a leading member, Cunliffe identified that checking property prices and addressing the underlying issues in the housing market would be his top agenda in the upcoming months.
Cunliffeís remarks come on the backdrop of the latest figures released by Nationwide building society this week which indicated that property prices had rise on average by 10.9%, the largest instance of price inflation in 7 years.
Cunliffe said: “There is good reason to believe that a … combination of strong demand, weak supply and expectations of a rising market could lead to a period of sustained and very powerful pressure on house prices in the UK.”
“Given their sensitivity to a change in economic conditions, a long tail of highly indebted households could represent vulnerability for both the banks and the economy. The data suggest that the size of this tail is increasing.”
Nationwide argued that their analysis of the Land Registryís information illustrated that the percentage of sales of houses exceeding £500,000 in value had risen from 13% back in 2007, to a staggering 25% last year. This trend extended to higher priced properties as well, with figures about houses valued over £1 million revealing that the number of purchases had risen from 3% in 2007 to 6.5% last year.
“Earnings growth is beginning to pick up, with wage increases finally outpacing the rise in the cost of living in February,” said Nationwide’s chief economist, Robert Gardner.
“Nevertheless, house price growth is outstripping income growth by a wide margin. The risk is that unless supply accelerates significantly, affordability will become stretched.”
Howard Archer, chief UK economist at IHS Global Insight, argued that bubble like symptoms are yet to be clearly illustrated in other areas of the country outside the capital but conceded that it is “certainly justifiable to talk of a house price bubble in London”. Official figures have shown that property prices have risen by 18% in the past 12 months, with certain places in the capital witnessing prices rise as high as 30%.
Nevertheless, Archer argued that it is still too early to talk about a nationwide housing bubble as the market outside of the capital still appears relatively stable.
“The strength of house prices is not yet a serious problem outside of the capital, and housing market activity is still not unduly strong compared to long-term norms, so in these respects it is premature to talk of a general housing market bubbleî.
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