The Bank of England deputy governor, Sir Jon Cunliffe, has warned that household debt is a key risk to the UK recovery and said the Bank's new measures to rein in the housing market should be thought of as insurance against a major crash.
In a speech at the International Festival for Business in Liverpool, Cunliffe said UK household debt was equal to 135% of household earnings, compared with 110% in 2000 and 165% in the runup to the financial crisis.
This is markedly higher than in other European countries, and on a par with the US, he added. Last week, the Bank's financial policy committee (FPC) laid out measures to limit risky lending, but stopped short of taking more drastic steps to cool the housing market.
The measures – the first limits on the mortgage market in 30 years – include that lenders must check mortgage applicants can cope with a 3 percentage point rise in interest rates – slightly tougher than current affordability checks.
From October, there will be a 15% cap on the number of mortgages that banks and building societies can give to people who want to borrow more than 4.5 times their income.
Cunliffe, who is in charge of financial stability at the central bank, said: "An outcome in which house prices grow more rapidly relative to income and do so for longer is ... quite plausible. It has certainly happened before in the UK. We know the pressure from demand for homes is great and that the supply of new homes is quite weak."
He concluded: "The stress test of the major UK banks towards the end of the year will assess the resilience of the system to a major crash.
The steps taken last week are insurance against the possibility of a sustained boom in the housing market leading a substantial increase and concentration in household debt that could make a crash more likely and more severe."
He said the main risk from the housing market was that house prices would continue to grow strongly and faster than earnings and lead to more household debt: "In short, the risk that more people take on higher debt relative to their income as they have to stretch further to buy homes."
His comments came after figures from Nationwide, Britain's biggest building society, showed the average price of a property in London had risen by more than a quarter to £400,404 over the past year, a rate of growth not seen since the summer of 1987.
In an earlier interview with BBC Radio 5 Live, Cunliffe identified the housing market as the "biggest risk" to the UK economy. A few days ago he said that Britain's obsession with home ownership could leave the Bank powerless to control household debt .
The International Monetary Fund has told the UK government that rapidly growing house prices are the biggest threat to the country's economic recovery.
theguardian.com
In a speech at the International Festival for Business in Liverpool, Cunliffe said UK household debt was equal to 135% of household earnings, compared with 110% in 2000 and 165% in the runup to the financial crisis.
This is markedly higher than in other European countries, and on a par with the US, he added. Last week, the Bank's financial policy committee (FPC) laid out measures to limit risky lending, but stopped short of taking more drastic steps to cool the housing market.
The measures – the first limits on the mortgage market in 30 years – include that lenders must check mortgage applicants can cope with a 3 percentage point rise in interest rates – slightly tougher than current affordability checks.
From October, there will be a 15% cap on the number of mortgages that banks and building societies can give to people who want to borrow more than 4.5 times their income.
Cunliffe, who is in charge of financial stability at the central bank, said: "An outcome in which house prices grow more rapidly relative to income and do so for longer is ... quite plausible. It has certainly happened before in the UK. We know the pressure from demand for homes is great and that the supply of new homes is quite weak."
He concluded: "The stress test of the major UK banks towards the end of the year will assess the resilience of the system to a major crash.
The steps taken last week are insurance against the possibility of a sustained boom in the housing market leading a substantial increase and concentration in household debt that could make a crash more likely and more severe."
He said the main risk from the housing market was that house prices would continue to grow strongly and faster than earnings and lead to more household debt: "In short, the risk that more people take on higher debt relative to their income as they have to stretch further to buy homes."
His comments came after figures from Nationwide, Britain's biggest building society, showed the average price of a property in London had risen by more than a quarter to £400,404 over the past year, a rate of growth not seen since the summer of 1987.
In an earlier interview with BBC Radio 5 Live, Cunliffe identified the housing market as the "biggest risk" to the UK economy. A few days ago he said that Britain's obsession with home ownership could leave the Bank powerless to control household debt .
The International Monetary Fund has told the UK government that rapidly growing house prices are the biggest threat to the country's economic recovery.
theguardian.com
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