Bank of England governor Mark Carney has warned the booming housing market poses dangers to the UK economy.
The former governor of the Bank of Canada said the “biggest risk” to the UK’s economy was in the housing market, speaking on Sky News’ Murnaghan show yesterday.
He said: “When we look at domestic risk, the biggest risk to financial stability and therefore to the durability of the expansion [of the economy] – those risks centre in the housing market.”
Mr Carney said there was not enough homes being built in the UK and highlighted that twice as many homes were being built in his native Canada every year compared with the UK.
Bank of England to intervene
The governor said the BoE could intervene by limiting mortgage types or changing the terms of the government’s two-phased Help to Buy scheme.
He said: “We could limit amounts of certain types of mortgages that banks could undertake, we could provide advice.
“The chancellor has asked us if we would provide advice on changing the terms of Help to Buy – all those things are possibilities and we will consider them all.”
Help to Buy was split into two phases: phase one, the equity loan scheme, is for new-build properties only; and phase two, the mortgage guarantee, is applicable to both new and resale homes. Both phases have a capped purchase price of £600,000.
On 1 April 2013 new legislation established an independent Financial Policy Committee at the BoE to monitor and protect financial stability in the UK.
The committee was tasked with publishing a record of its policy meetings, and is responsible for the BoE’s bi-annual Financial Stability Report.
In its latest meeting held on 19 March 2014, the committee said there was “continued evidence of increasing momentum in the UK housing market”.
“The chancellor cannot wash his hands of what’s happening in the housing market”
Ed Balls, shadow chancellor
The committee also highlighted the number of mortgage products offering high loan to value ratios had doubled over the last six months.
Mr Carney said the BoE was “closely watching” the rise in property prices and the large increase in high loan to value mortgages, which he said could lead to a “debt overhang”.
In the November 2013 Financial Stability Report, the FPC said it would “remain vigilant to emerging vulnerabilities” in the housing market and would continue to monitor the conditions “closely”, taking action if necessary.
Housebuilding on the rise
Politicians have been quick to respond, including prime minister David Cameron who said housebuilding rates were improving, despite agreeing that there was still an issue with undersupply.
He told Sky News: “The building of houses is going up. If you talk to any housing developer at the moment, or builder, they will tell you the Help to Buy scheme…has been hugely helpful in bringing forward more development or house building.”
Deputy prime minister Nick Clegg told the BBC’s Andrew Marr show: “I think if [Mark Carney] says we need to pare back on some of the government schemes like Help to Buy, then I think we should do so.”
Mr Clegg also agreed there was a “big long-term problem” around housing supply but insisted the government was making progress.
Shadow chancellor Ed Balls said Mr Carney was right to warn about the risks of a “lop-sided” housing market and said it was now up to chancellor George Osborne to act on housing supply.
He said: “He should also reform Help to Buy by cutting the £600,000 limit and introduce the Help to Build scheme we have called for. The chancellor cannot wash his hands of what’s happening in the housing market.
“Unless the government acts, the danger is the Bank of England will be forced to raise interest rates prematurely.”
HBF chairman Stewart Baseley said the Help to Buy equity loan scheme, which was recently extended to 2020, was increasing supply.
He said: “Whilst the number of equity loan scheme sales is very small in terms of the overall housing market, it is driving up new housing supply.”
“We have an acute shortage of housing that has developed over decades and is going to take time to address. After years of the lowest rate on record, housebuilding is now increasing very rapidly,” he added.
Mr Baseley highlighted private housing starts for Q1 2014 were up 44 per cent year on year, with March private starts up 34 per cent and added “to maintain and sustain these increases, housebuilders need stability.”
He said the extension to the Help to Buy equity loan scheme was allowing housebuilders to “plan ahead, rebuild capacity lost in the downturn and deliver.”