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Mark Carney: rising house prices pose biggest risk to recovery Mark Carney: rising house prices pose biggest risk to recovery
(about 11 hours later)
The housing market poses the biggest risk to Britain's economic recovery as a shortage of new homes drives up prices, the governor of the Bank of England has warned. House prices are rising at their fastest rate in more than six years and have climbed 8.9% year on year, adding to worries about the property boom as the Bank of England governor became the latest senior figure to express concern.
Mark Carney said steeply rising house prices were caused by structural problems in the housing market that restricted the supply of homes. Mark Carney warned on Sunday that the housing market posed the biggest risk to Britain's economic recovery as a shortage of new homes drives up prices.
With families unable to afford a home without taking on ever larger mortgages, the Bank of England could be forced to tackle lenders that offer risky loans. Property website Rightmove said the average asking price is nearly 9% higher than a year ago, rising to a new record of £272,003 in May – the highest annual increase since October 2007.
Speaking on the Sky News Murnaghan programme, Carney said the central bank was unable to solve the shortage of new houses. He said the rate of housebuilding was half that in his own country, Canada, despite the UK having a population twice the size. Prices in London rose more than 16% over the same period, as Rightmove said the market in the capital was "frothy".
David Cameron responded to Carney's comments by saying he was well aware of the need for more new homes, which was why he had simplified the planning process in favour of developers. He said that as a result there was more new homebuilding than at any time since the recession. Miles Shipside, Rightmove's housing market analyst, said a shortage of housing was underpinning prices in London.
Carney made the headlines last week when he played down demands for an early interest rate rise. Some economists have called on the bank to raise rates to cool the housing market and temper economic growth, which is running at more than 3%. "For a bubble to burst you need a sustained drop in demand, yet agents in the capital report a consistently high level of would-be buyers in markets that are not yet out of reach for Londoners," he said.
In a speech to accompany the central bank's quarterly inflation report, Carney said the recovery remained vulnerable to shocks and the economy, with more than two million people unemployed and many households still with high debts, needed a longer period of cheap credit. "So while you might describe London's annual jump of over 16% as being as a result of a very frothy market, it is underpinned by long-term demand and a genuine shortage of housing supply.
In the interview he said the Bank of England was watching to ensure the banks had enough reserves to withstand the risks of bad loans should the housing market suffer a downturn. It was also checking lending procedures to try to ensure that mortgages were only issued to people who could afford them. "The northern regions are still below their previous peaks, and while all four southern regions are at all-time highs, the average annual rise outside London remains below 5%."
However, Carney highlighted the housing market as the main threat to the economic recovery. Speaking on Sky News' Murnaghan programme, he said the Bank of England was watching to ensure that banks had enough reserves to withstand the risks of bad loans should the housing market suffer a downturn.
It was also checking lending procedures to try to ensure that mortgages were only issued to people who could afford them.
"By reinforcing both of those we can reduce the risk that comes from a housing market that has deep, deep structural problems," he said."By reinforcing both of those we can reduce the risk that comes from a housing market that has deep, deep structural problems," he said.
Nevertheless, he said there was evidence that large-value mortgages – with loans of more than four times a borrower's salary – were on the rise again, with the risk that they could destabilise the economy. Nevertheless, he said there was evidence that large-value mortgages – with loans of more than four times a borrower's salary – were on the rise again. The Bank has the power to issue recommendations on the scale of loan-to-value ratios.
"The biggest risk to financial stability, and therefore to the durability of the expansion – those risks centre in the housing market, and that's why we are focused on that," he said. "We don't want to build up another big debt overhang that is going to hurt individuals and is very much going to slow the economy in the medium term."The biggest risk to financial stability, and therefore to the durability of the expansion – those risks centre in the housing market, and that's why we are focused on that," he said. "We don't want to build up another big debt overhang that is going to hurt individuals and is very much going to slow the economy in the medium term.
"We would be concerned if there were a rapid increase in high loan-to-value mortgages across the banks … we have seen that creeping up and it is something we are watching closely.""We would be concerned if there were a rapid increase in high loan-to-value mortgages across the banks … we have seen that creeping up and it is something we are watching closely."
He added: "The level of higher loan-to-income mortgages, ones above four and a half, five times loan-to-income, potentially could store up bigger problems for the future and we need to be careful."
Carney said the central bank was unable to solve the shortage of new houses. At 123,000 units per year, housebuilding remains well below the 200,000 many economists consider to be the minimum needed.
"We're not going to build a single house at the Bank of England and we can't influence that," Carney said. He said the rate of homebuilding was half that in his own country, Canada, despite the UK having a population twice the size.
His comments received encouragement from deputy prime minister Nick Clegg, who for the first time said the government should curb its Help to Buy mortgage subsidy scheme if the Bank recommends doing so.
Clegg told the Andrew Marr Show on BBC1: "I think if [Carney] says we need to pare back some of the government schemes like Help to Buy, then I think we should do so. He's certainly right when he says the big long-term problem is we simply don't build enough homes in this country, we haven't done so for years, we're making progress now but we need to do much more in the future."
David Cameron also responded on the Murnaghan programme to Carney's comments by saying he was well aware of the need for more new homes, which was why he had simplified the planning process in favour of developers.
He said that as a result there was more new homebuilding than at any time since the recession.
"We have given the Bank of England the duty to make sure that bubbles are dealt with in the economy. They have all the powers they need to do that," he said.
He acknowledged, however, that more homes are needed to be built in order to satisfy demand. "[Carney] is absolutely right when he says fundamentally we need to build more houses in Britain," he said.
A housebuilding industry representative said Help to Buy was addressing Carney's concerns. Stewart Baseley, executive chairman of the Home Builders Federation, said: "We have an acute shortage of housing that has developed over decades and is going to take time to address. After years of the lowest rate on record, housebuilding is now increasing very rapidly." He credited the government's Help to Buy equity loan scheme, which has given a boost to housebuilding and allowed the industry to plan ahead.
Carney made the headlines last week when he played down demands for an early interest rate rise. Some economists have called on the bank to raise rates to cool the housing market and temper economic growth, which is running at more than 3%.
The Bank of England has already begun a review of the Treasury's Help to Buy scheme at the request of the chancellor, George Osborne.The Bank of England has already begun a review of the Treasury's Help to Buy scheme at the request of the chancellor, George Osborne.
Osborne, who is equally concerned to stall an unstable house boom, wants the Bank to see whether the scheme, which underwrites mortgage deposits mainly for first-time buyers, is encouraging people to take on unaffordable homes.Osborne, who is equally concerned to stall an unstable house boom, wants the Bank to see whether the scheme, which underwrites mortgage deposits mainly for first-time buyers, is encouraging people to take on unaffordable homes.
Nigel Lawson, a chancellor during Margaret Thatcher's time as prime minister, said Carney had been given the responsibility to advise the government over the scheme and should stop "bleating about it" and make a decision. Nigel Lawson, a former chancellor during Margaret Thatcher's time as prime minister, said Carney had been given the responsibility to advise the government over the scheme and should stop "bleating about it" and make a decision.
He added he would like to see Help to Buy phased back or brought to an end, plus a 0.25% rise in the official interest rate before the end of 2014. He added he would like to see Help to Buy phased back or brought to an end, plus a 0.25% rise in the official interest rate before the end of 2014. The Tory peer, now known as Lord Lawson of Blaby, told BBC Radio 4's The World This Weekend: "I think [Carney] is absolutely right to express his concern but George Osborne has very sensibly charged the Bank of England with the responsibility of telling him when Help to Buy should be either phased back or ended altogether. So really the ball is in Mark Carney's and the Bank of England's court, and the question is if he is advising the chancellor that the time has come – and I think it has myself – to scale it back or indeed end it altogether, and if not why not.
The Tory peer, now known as Lord Lawson of Blaby, told BBC Radio 4's The World This Weekend: "I think [Carney] is absolutely right to express his concern but George Osborne has very sensibly charged the Bank of England with the responsibility of telling him when Help to Buy should be either phased back or ended altogether. "He's not just a commentator like you or I. He has a responsibility to discharge and the question is, is he doing that?"
"So really the ball is in Mark Carney's and the Bank of England's court, and the question is if he is advising the chancellor that the time has come – and I think it has myself – to scale it back or indeed end it altogether, and if not why not.
"He's not just a commentator like you or I. He has a responsibility to discharge and the question is is he doing that?"
Lawson said he was sure the government would accept the advice if Carney called for the scheme to be scaled back or ended.Lawson said he was sure the government would accept the advice if Carney called for the scheme to be scaled back or ended.
He said: "They wouldn't argue. They would accept it. That's the reason why they asked him to advise them, so it's up to him to decide is he going to do it or not. He said: "They wouldn't argue. They would accept it. That's the reason why they asked him to advise them so it's up to him to decide is he going to do it or not.
"I think just sort of bleating about it, however well justified his views are, is not really what he should be doing.""I think just sort of bleating about it, however well justified his views are, is not really what he should be doing."