Property prices are the “biggest risk” to the UK economy warns Bank of England deputy governor

3rd July 2014


Bank of England deputy governor Sir Jon Cunliffe has urged that the UK’s housing market presently poses the greatest threat to the UK economy.

In an interview with the BBC, the Bank’s deputy governor for financial stability said a “sustained rise” in house prices would be of concern, asserting that the issue of prices rising faster than people’s incomes were a particular hazard.

He said: “Some months ago I thought the biggest risk at that point came from the UK housing market in Britain.

“And it’s not the risk around house prices as such, it’s the risk that we get a sustained rise in house prices – and this is very important – house prices rising faster than people’s incomes.

“That leads to the sustained increase, a big increase in the amount of debt in the economy, in the amount of debt that mortgage holders have.”

This week statistics from Nationwide showed that UK house prices have now surpassed their 2007 high, with the typical home now costing £188,903. In London, the building society found that costs had gone above the £400,00 mark for the very first time.

New measures

In an attempt to calm the property market, last week the Bank of England announced measures to introduce even stricter affordability checks and limit the amount of higher risk loans offered to borrowers.

It recommended that when assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, interest rates were to be three percentage points higher than the initial rate. It added that the Prudential Regulation Authority and the Financial Conduct Authority should ensure that mortgage lenders limit the proportion of loans to income multiples of 4.5 and above to no more than 15% of their new mortgages.

In its Financial Stability Report, the Bank of England Financial Policy Committee (FPC) stated: “The recovery in the UK housing market has been associated with a marked rise in the share of mortgages extended at high loan to income multiples. At higher levels of indebtedness, households are more likely to encounter payment difficulties in the face of shocks to income and interest rates.

“This could pose direct risks to the resilience of the UK banking system, and indirect risks via its impact on economic stability.”

Bank of England Governor Mark Carney added that the outlook for household indebtedness was of a concern. He said: “Although UK households have made progress in repairing their balance sheets, they start from a vulnerable position, with debt at 140% of their disposable income. The share of mortgage lending at high loan-to-income ratios has increased markedly over the past year to a record high. Given the momentum in the housing market, and the underlying shortage of housing supply, it is likely that this trend will continue.”




1 thought on “Property prices are the “biggest risk” to the UK economy warns Bank of England deputy governor”

  1. Anonymous says:

    Sir Jon Cunliffe said that “unfortunately the Bank of England can’t control housing prices” and his BBC interviewer agreed with him. She added that all the Bank could do was control the lending side of things. So what more control is necessary to bring down housing prices, if desired? Does either of these people seriously think that if the bank rate was hiked very substantially that house prices would not go into a tailspin? Sir Jon should have said that in its existing remit the BoE is not supposed to target house prices, but this could change. From March 1995 to December 2003 the central bank’s target inflation indicator gave a substantial weight to current house price changes. It was perceived as the duty of the BoE to control house prices along with other prices. It seems all the more bizarre that Sir Jon should be making such a non possumus declaration less than two months before the ONS is to publish a quarterly consumer price series for owner-occupied housing based on the net acquisitions approach. Such a series could and should be made a component of the BoE’s target inflation indicator so that controlling house prices would once again be part of the Bank’s remit. These issues are covered in more detail in my paper “Twenty Years of Inflation Targeting at the Bank of England”:

    Andrew Baldwin

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