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No Housing Boom Seen by Treasury as BOE Set to Act: U.K. Credit

Tuesday, 24 Jun 2014 07:47 AM

June 24 (Bloomberg) -- As Britons brace for the Bank of England to announce steps this week to restrain the housing market, the No. 2 at the U.K. Treasury dismisses talk of a bubble.

“People shouldn’t get carried away with the scale of the problem,” Chief Secretary to the Treasury Danny Alexander said in an interview at Bloomberg LP’s New York headquarters yesterday. “It’s localized” in London and southeast England, he said. “Across the rest of the U.K. you have seen rises in property prices but they’re at a much more subdued level.”

The comments come amid investor expectations that Bank of England financial-stability officials will outline action this week to stop households taking on levels of debt that could pose a threat to the economy. The Financial Policy Committee met on June 17 and its decisions will be made public when the BOE publishes its twice-yearly Financial Stability Report June 26.

“The committee is expected to have come to the view that acting now to curb risks of financial instability is a prudent course of action,” said Sam Hill, senior U.K. economist at RBC Capital Markets in London.

Pressure to act has mounted as rising house prices stretch affordability for new homebuyers. BOE Governor Mark Carney said this month that household indebtedness, at about 140 percent of gross disposable income, is the biggest threat to the recovery and that macro-prudential tools, rather than interest rates, should be the first line of defense against financial instability.

Debt Burdens

In the U.S., the debt-to-GDI ratio was 109 percent in 2012, according to the latest estimates from the Organization for Economic Cooperation and Development. It was 87 percent in Germany.

Government data last week showed home prices rose 9.9 percent in April from a year earlier, the most in four years, and by almost 20 percent in London. Eighty-five percent of economists in a Bloomberg survey this month said the FPC should act.

Rising prices are spurring an economy set to grow this year at its fastest pace since 2007. That’s led BOE officials to warn that the benchmark interest rate could go up as early as this year. Investors are fully pricing in a quarter-point increase to 0.75 percent by February, according to derivatives trading.

FPC Options

Options for the FPC, which is led by Carney, included toughening affordability tests and making banks hold more capital against mortgage lending. Officials can also recommend curbs on the amount people are able to borrow -- an outcome seen as the most likely by Hill at RBC -- and urge changes to Help to Buy, a government program to help those with small down payments onto the housing ladder.

“We’ve equipped the BOE with very substantial new powers to manage and address” risks stemming from the housing market, said Alexander. “Of course if they recommend changes, then those changes should be followed through.”

Alexander said that, adjusted for inflation, U.K. house prices remain below their level in 2007, with average values outside London rising at just 7 percent a year.

“Action that ends up suppressing the housing market across the rest of the U.K. -- that could cause a difficulty for our recovery,” he said. “It’s quite a balanced set of judgments that need to be made.”

More Homes

He also denied Help to Buy is contributing to pressure on prices, saying the average value of a home bought under the program is about 150,000 pounds -- compared with a national average of 260,000 pounds and 485,000 pounds in London -- and almost all purchases are outside the capital.

Instead, homebuilding in the U.K. needs to double to about 300,000 units a year, he said.

In a survey published yesterday, the Bank of England said mortgage demand increased “significantly” this quarter, though new rules to ensure borrowers can meet repayments over the long- term were having an effect, with lenders forecasting the first decline in maximum loan-to-income ratios in more than two years.

“I’m confident the Bank of England has all the powers that it needs to take appropriate action,” Alexander said.

--With assistance from Brendan Murray in Washington.

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Sandrine Rastello in Washington at srastello@bloomberg.net To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Andrew Atkinson, Eddie Buckle

© Copyright 2017 Bloomberg News. All rights reserved.

 
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No Housing Boom Seen by Treasury as BOE Set to Act: U.K. Credit
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Tuesday, 24 Jun 2014 07:47 AM
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