6th June 2014
The UK has been warned it faces a property bubble and homeowners are become ‘more vulnerable’ to the prospect of rising interest rates, and should consider introducing a loan-to-income mortgage cap.
The International Monetary Fund (IMF), which oversees the financial stability of its 188 member countries, has told the UK government it must keep a close eye on its Help to Buy (HTB) scheme and do more to encourage housebuilding to help rectify the imbalance between supply and demand that is pushing up property prices.
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In its assessment of the UK economy, the IMF said the recovery had ‘momentum’ and GDP growth was ‘expected to remain strong this year’ but majored on soaring house price inflation, which is said was seeping out of London and ‘becoming more widespread’.
‘So far, there are few of the typical signs of a credit-led bubble,’ said the report. ‘Nonetheless, a steady increase in the size of new mortgages compared with borrower incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks.’
In order to avoid borrowers over-burdening themselves with large home loans, the IMF said the government may want to consider limiting high loan-to-income mortgages.
‘Limits on the proportion of high loan-to-income mortgages any lender can issue would help to contain directly the currently most pressing risks to financial stability – if such limits prove insufficient, outright caps on loan-to-income or loan-to-value (LTV) ratios may need to be considered. Raising lenders’…capital requirements would build additional buffers against increased exposure to the housing sector,’ said the IMF.
It added that these measures, if they were to be employed, should be done so ‘early and gradually’.
The government’s HTB scheme, that offers equity loans and mortgage guarantees to help those with a 5% deposit buy a home worth up to £600,000, also came under scrutiny. Although the IMF said the scheme had enabled ‘creditworthy lower-income households to purchase home, especially outside London and the South East’ the Bank of England’s Financial Policy Committee will need to act if the ‘volume of high LTV transactions rises’ enough to cause a financial risk.
Overall, the IMF reiterated what many property and mortgage experts have long been saying; the UK needs to build more homes.
‘Imbalances in the housing market should be addressed through supply-side remedies. Fundamentally, house prices are rising because demand outstrips supply,’ it said. ‘The UK has a secular problem with inadequate housing supply, associated with planning restrictions and compounded by depressed housing starts since the financial crisis.’
Despite acknowledging the problem of lack of housing stock, the IMF warned that any new initiative to spur housebuilding needed political consensus.
‘The government has introduced major changes to the planning system to create incentives for local councils to increase available land for housing development, and there are some signs of recovery in housing construction,’ it said. ‘Nonetheless, key inefficiencies remain. These include unnecessary constraints on brownfield and Greenfield developments; tax policies that discourage the most economically-efficient use of property; and underdeveloped rental markets with relatively short lease terms.’
Chancellor George Osborne, before the publication of the IMF’s report, said he believed he would agree with everything the organisation put forward and following publication he remained true to that pledge.
‘I also agree with the IMF that we need to remain vigilant for any risks that might emerge in the housing market,’ said Osborne. ‘That’s why I have given the FPC new macro-prudential tools should they see a risk of financial stability – and as I’ve made clear that includes recommendations to me on the parameters of the Help to Buy scheme.
‘The only long-term answer to Britain’s housing problem is to build many more houses in this country. That’s why we’ve reformed our planning laws – with new permissions rising and house building up a quarter over the last year. But the biggest risk to our recovery would be to abandon the economic plan that is working.’
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