OECD warning on house prices adds to pressure on Osborne over Help to Buy
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Version 0 of 1. George Osborne is under further pressure to scale back the Treasury's Help to Buy mortgage scheme after calls from a leading thinktank for a clampdown on easy credit to bring "excessive" house prices under control. The Organisation for Economic Co-operation and Development (OECD) said Britain's housing market, buoyed by record low interest rates and several government-backed subsidies for home buyers, was in danger of over-heating without further action by ministers and regulators. The warning follows last week's intervention by the Bank of England, which issued its strongest warning yet about the resurgence of the housing market. The OECD report follows a near 11% annual rise in house prices and a rise across many parts of the UK above their pre-recession peak. In comments that urged the Treasury and the Bank to be braced for action, the OECD said interest rate hikes should be considered alongside other measures, such as tighter lending rules for buyers, to help rein in the market. "Monetary policy tightening should be accompanied by timely prudential measures to address the risks of excessive house price inflation," it said. Warning of boom-like conditions, the thinktank added: "House prices are buoyant and significantly exceed long-term averages relative to rents and household incomes." The OECD said further action on housing might include "tighter access" to the Help to Buy scheme and suggested the introduction of higher capital requirements for mortgage lenders and maximum loan-to-value ratios for mortgages. Government changes to pension rules, allowing people to take higher lump-sum withdrawals from their savings, could also boost the housing market, the OECD said. As he departed a European finance minister's meeting in Brussels on Tuesday, Osborne said: "I've said we should be vigilant about the housing market and this government has given the Bank of England the powers, the tools, to do that in an independent way." Last week Sir John Cunliffe, the Bank deputy governor, said the prospect of another boom and bust in the housing market could be likened to "a movie that has been seen more than once in the UK". He added that the Bank was prepared to act to restrain prices. "It would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year." His speech followed a similar warning by the Bank's chief economist, Spencer Dale, who said last week that spiralling house prices posed a threat to the UK's financial stability. The warnings add to the intense debate about the impact of the housing recovery since prices began to climb last year. The Help to Buy scheme, which subsidises mortgage deposits, is credited with swelling the number of younger people able to buy a home, especially outside London and the south-east. Another subsidy, the Bank of England-backed funding for lending scheme (FLS), has provided banks with cheap funds to pass on as cut-price mortgages. Both schemes are behind not only a revival in the housing market, but also a more general recovery in consumer sentiment. The Treasury has already restricted the FLS to business borrowers, and last month added more rigorous checks on whether borrowers who need high-loan-to-value mortgages can afford their loans. But it has yet to limit the scope of Help to Buy, either by reducing the £600,000 upper house price limit or by excluding London and the south-east, as some critics have urged. London's dominance has skewed the picture following an 18% rise in prices over the last year. Labour has blamed the government for a lack of housebuilding, which the party says has sent prices rocketing. According to the latest industry figures, the number of new housing estates under construction is at a post-recession high, but still well short of demand. Osborne is understood to believe that tougher credit checks for those seeking mortgages, introduced last month, will cool the housing market over the next year without restricting the Help to Buy scheme. The Financial Conduct Authority, which oversees the new credit rules, has instructed lenders to check on every homebuyer's ability to pay their mortgage, taking into account their monthly outgoings and a near doubling in their interest bill. Early signs show that the tougher regime and the prospect of a rise in interest rates next year from their current level of 0.5% – as signalled by several Bank of England officials – has already reduced the number of mortgage approvals. A meeting of the Bank's financial policy committee in June could add tougher measures, but is expected to wait and see how much impact the FCA's new rules have on prices. Overall, the OECD report raised the estimate for UK economic growth this year to 3.2% and said it was likely to remain strong on the back of business investment and high street spending. Figures released on Tuesday for the UK's services sector showed pickup for the biggest part of the economy, covering banks to hotels. The data follows upbeat surveys on the smaller manufacturing and construction sectors and reinforced the view the UK recovery will maintain its momentum over coming months. |