Is UK Property Boom Causing Another Financial Crisis?

Lord Turner is the former head of the City regulator. He said that he is worried that economic recovery is built on same factors that led to financial crisis. See telegraph article here.

Lord Turner said he was "worried" that the UK was "developing a recovery which is simply returning to the very issues that led us to this problem in the first place.

Britain's property obsession has left the country at risk of another major financial shock, the former head of the City watchdog has warned. Lord Adair Turner, the ex-chairman of the Financial Services Authority (FSA), said mortgage and commercial property lending in advanced economies had played a "central role" in almost all financial crises and post-crisis recessions.

Much of the investment in the advanced world was now focused on real estate, he added. While he said this was an inevitable part of a modern economy, it also increased the risk of another boom and bust. "We have made it incredibly favourable to buy houses," Lord Turner told The Telegraph. "The supply issue is very important and we've got to increase the supply of housing because otherwise we are just piling up very strong incentives to buy housing, very strong incentives to borrow money to buy housing but against a fixed supply. "If you do that the only thing that can give is the price."

Lord Turner also said he was "worried" that the UK was "developing a recovery which is simply returning to the very issues that led us to this problem in the first place. "Even the Office for Budget Responsibility has said the only way we're going to get growth back in the next five years is for the [debt to income ratio] to go all the way back to 170pc again.

If in five years time debt has gone back up to 170pc, and if interest rates have returned to 3pc, 4pc or 5pc, then a lot of people are going to be struggling." Lord Turner said in a speech at Cass Business School on Wednesday night that targeted reforms to curb credit fuelled growth were needed to prevent a repeat of the 2008 financial crisis.

"The policies followed before the financial crisis failed to prevent it," he said. "In its wake major financial reforms have been introduced. These include higher capital and liquidity standards, more effective bank resolution procedures: measures to address risks in derivatives trading: and structural reforms such as ring fencing... While these reforms are valuable, they will be insufficient to ensure a more stable financial system and economy over the long term.

"We need to recognise and contain the potential for instability which [reliance on in real estate lending] unleashes," added Lord Turner. "Policies relating to the supply of new real estate, and to its taxation will likely prove as important to to financial and macroeconomic stability as reforms specifically focused on the financial system itself. "[Credit cannot be] constrained through the use of the interest rate lever alone."

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Some more views on this issue here:
http://www.cityam.com/debate/1395941773/lord-turner-right-uk-s-property-boom-risks-causing-another-financial-crisis
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Our views
We do not think that UK will be hit with another financial shock, at least not yet.  Under Chancellor Osborne of the Tory Government, the UK finances are making great improvements.  Read Osborne's full speech here. 

Growth has been revised upwards. Debt has come down significantly, though there is a long way to go.  UK Government has also adopted a very pro-business outlook.  In fact, their main Corporate Tax rate is going to be cut to just 21% from 1st April 2014, an extremely low rate for a developed OECD economy.  See UK HMRC website.

However, the views of Lord Turner should be considered carefully. There will be warning signs, if indeed the UK runs into another financial crisis.

This is why we say that investments, especially in overseas property like UK property, is a lot of hard work. Continue to spend time reading and analysing the macro-economic situation, otherwise you may be caught off-guard.