Bank of England fears mount over property price spiral

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By Chris Giles, Sam Fleming, Elaine Moore and Delphine Strauss

Bank of England has given its strongest warning yet that a housing bubble threatens derail the UK economy, saying that spiralling property prices were now “the very brightest [hazard] light” its dashboard.

In a speech in London yesterday evening, Sir Jon Cunliffe, deputy governor, said the danger signs resembled “a movie that has been seen more than once in the UK”.

His speech came after figures from the Nationwide Building Society showed that house prices rose at an annual rate of 10.9 per cent in April, sending the pound to a five-year high against the dollar and intensifying expectations of an earlier interest rate rise.

Noting that housebuilding still lagging far behind demand for property, Sir Jon said: “There is good reason to believe that a mutually reinforcing combination of strong demand, weak and expectations of a rising market could lead to a period of sustained and very powerful pressure on house prices.”

Making it clear that the BoE would not stand by this time as prices rose, he added, “it would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year”.

The June meeting of the Financial Policy Committee, on which Sir Jon sits, will mark a major test of the UK’s new framework, which aims to use financial regulation to curb booms and busts.

The FPC has a range of levers it can pull to calm the market: it can recommend a tightening of mortgage underwriting standards; it can suggest that the Treasury pares back its Help to Buy scheme, which guarantees high loan-to-value mortgages; or it can force banks to hold more capital against mortgages.

Sir Jon also made it clear that households must accept interest rates will need to rise “once the recovery is well established”, a condition that has arguably already been met.

He said it was particularly important to ensure that the current low levels of interest rates did not “mask” the cost of mortgages and “create more headroom for prices to rise”.

Expectations of earlier interest rate rises intensified even before Sir Jon’s speech after strong data underscored the pace of the recovery. Markets now expect the first rate rise in February or March next year, significantly earlier than the consensus of May that was priced in three months ago.

The government also has to pay much more to borrow in sterling than many eurozone economies. The difference between borrowing costs for the UK and Germany have reached a level not seen since the eurozone was created. The pound has climbed about 11 per cent against the dollar since last July, although it remains well below the peaks of before the crisis. (FT)