Can the Bank of England curb the housing bubble?

Houses in London

It is a big day for the Bank of England, the first time its new Financial Policy Committee is expected to exercise powers to stem overheating in a part of the economy that could destabilise banks and the financial system.

As you all know (you ought to by now, for gawd's sake), the bubblicious market of concern to the Bank's boffins and regulators is the housing market in London and the South East, where prices have been rising at dangerously fast rates (circa 20% per annum in the metropolis).

Here's a little film I made yesterday about what is going on in London and what the Bank of England is likely to do about it.

The dilemma for the Bank is how to snuff out dangerous price rises in London without killing off the green shoots of a much milder housing-market recovery in the rest of the UK - in that a gently rising housing market in most of this country would not be such a bad thing.

What I would expect the Bank to announce is:

1) a proposed formalisation of the voluntary restrictions announced by Lloyds and RBS, viz a prohibition on mortgages greater than four times household income for loans of more than £500,000 - because in most of the country outside London and the south, there are relatively few houses worth more than that.

2) a tightening up of the so-called affordability test banks apply to anyone requesting a mortgage, to ensure they can keep up the repayments in the event mortgage rates rise to 7%.

There is an outside chance banks will also be asked to hold more capital as a protection against possible losses on new mortgages that are a high multiple of income or a high proportion of a home's value.

Now this may take some of the steam out of the London market. But it is important to make two caveats.

First, this is new ground for the Bank of England and the UK, so we can't be certain what the precise impact of these mortgage curbs will be.

Second, much of the London market is being driven by cash buyers - and the Bank has no influence over their behaviour.

One final thought.

Much of the boom in the London market is being driven by buy-to-let purchases - as Huw van Steenis of Morgan Stanley has pointed out.

Yesterday I spoke to Lord Turner, former chairman of the defunct Financial Services Authority. He thinks there is a case for special measures by the Bank of England to take the steam out of buy-to-let.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 63.

    Many more energy efficient houses need to be built on pre used or low grade land. Our prime agricultural land must be protected. This huge population must eat !! We destroy our greatest asset at our peril.

  • rate this

    Comment number 62.

    a ponzi scheme which the government and BOE has no intention of allowing to fail.

    Why aren't we building more affordable housing?

  • rate this

    Comment number 61.

    The averagely priced house, since about 1952, through to recently, has been bought for a median of no more than 3.5x individual average salary, with an average mortgage rate of 7% interest, and an average downpayment of 10%.
    Thats been the definition of affordability for half a century.
    Yet the average wage earner, today, £26k, buys the averagely priced house, at £250k, they're paying 10x salary.

  • rate this

    Comment number 60.

    Justin 57

    What I mean is, if the monthly repayment on a 500k BTL loan is X then the rental on a 500k property should (other things being equal) be materially less than X. If it isn't that's a sign of something interesting.

    Inkling 55

    Yes, although it shouldn't be possible it is sometimes possible. Most times however, when schemes advertise such a return, there's a killer catch.

  • rate this

    Comment number 59.

    In the 1960's, 1970's, 1980's and 1990's, the individual average wage earner was able to afford the averagely priced house, for 2.5x - 3.5x individual salary.
    Yet the average wage earner today, on £26k, who goes out to buy the averagely priced house, which now costs £250k, will be paying 10x his/her salary.
    And the cost of living is much higher today as well.


Comments 5 of 63



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