Bank of England Warns Housing Boom May Turn To Crash

Britain's booming housing market could be heading for a fresh crash, the Bank of England said in its toughest warning yet about the dangers of the return of rapidly rising property prices.

Sir Jon Cunliffe said it would be dangerous to ignore the momentum apparent across the country and dropped strong hints of new measures to slow down the market in the months ahead.

Sir John Cunliffe, Deputy Governor for Financial Stability, Bank of England

On a day when it emerged that one in 15 London homes are now selling for £1m or more, Cunliffe said Britain had a history of booms turning to bust. "This is a movie that has been seen more than once in the UK."

Borrowers May Find Themselves in Trouble When Interest Rates Rise
The Bank's deputy governor said that there were always risks to financial stability "blinking on the dashboard" but made clear his concern about the possibility that borrowers taking on large mortgages could find themselves in trouble when interest rates inevitably rose.

Soft Landing?  UK Has Already Introduced Mortgage Market Review (like Singapore's TDSR)
Housing market could have a "soft landing" as houses became less affordable and lenders tightened up the conditions for granting homes loans. "But other outcomes are very possible and the financial policy committee [FPC] will need be both vigilant and ready to act."

He said the risk was of "a major overshoot in prices and buildup in debt followed by a sharp correction with negative equity and an overhang of debt for many households", adding: "Unfortunately, there are more precedents in UK for periods of a rapidly growing housing market to end in this way."

Figures from the Nationwide building society showed annual house price inflation at a seven-year high of 10.9%. 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."

Analysis of Land Registry Data
Nationwide said that in London the proportion of sales involving homes costing more than £500,000 had leaped from 13% in 2007 to around 25% in 2013. For properties costing more than £1m, the figure has more than doubled from 3% to 6.5% over the same period.

The building society's latest house price index showed the average house price in the UK is now £183,577. The monthly rate of growth has picked up, with a rise of 1.2% following March's 0.5% increase.

Economic Recovery - Wage Increases Finally Outpaced Inflation 
"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, said it was "certainly justifiable to talk of a house price bubble in London". Prices in the capital are up 18% on a year ago, with some areas up more than 30%. However, he added: "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 bubble."

So How Will Bank of England Intervene In The Housing Market?
Reports indicate that the Bank of England is unlikely to use interest rates because Governor Mark Carney said last year that he won't increase interest rates till unemployment fell below 7%.

Bank of England Governor Mark Carney

One option is to order the banks to get a higher deposit before a loan can be granted.  That sounds like a pull-back of the 'Help to Buy' scheme. He could also cap the tenure of the loan (i.e. shorter tenures)

All we can do is wait and see.  That said, better for the Bank of England to intervene to cool the 'bubble' than let UK go through boom and bust cycles again.

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