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George Osborne concedes rising house prices threaten UK economy IMF sounds alarm on UK house prices but changes its tune on austerity
(about 11 hours later)
George Osborne has conceded that a housing bubble remains a threat to the recovery following comments by the International Monetary Fund (IMF) in its annual appraisal of the UK economy. The International Monetary Fund has warned that a housing bubble could derail the UK's economic recovery, as it urged the government to consider reining in the Help to Buy scheme and called on the Bank of England to clamp down on risky mortgages.
The chancellor said he agreed with IMF head Christine Lagarde's conclusion that Britain must keep a close eye on rising house prices and indebtedness. The IMF also ended its row with George Osborne over austerity by describing the chancellor's deficit reduction plan as "appropriate" in its annual review of the British economy. Christine Lagarde, the IMF's managing director, admitted that the organisation had underestimated the strength of the UK's economic recovery and predicted that it would continue for the next few years.
Speaking on BBC Radio, Osborne said: "I agree with Christine Lagarde that we need to be alert to the build-up of debt in the housing market. We need to be alert when we see house prices rising. But in the same week that the European commission expressed concerns over the domestic housing market, Lagarde added to the chorus of concern over the role of property in Britain's economic revival. Presenting the report in London on Friday, she said the UK needed to restrict high loan-to-income mortgages and reconsider the Help to Buy mortgage subsidy programme to prevent families becoming vulnerable to a collapse in house values or a surprise interest rate rise.
"I have given the Bank of England tools to do the job, and they should not hesitate to use those tools if they see these developments turning into a risk to the British economy. Responding to the review, the chancellor conceded that Britain must keep a close eye on rising house prices and indebtedness, but welcomed the IMF's overall endorsement. Osborne made clear that he expects the Bank of England to take action, which could include limiting mortgage ratios and recommending changes to Help to Buy, if it sees a housing bubble forming.
The IMF said that rising house prices remained one of the major threats to the recovery alongside poor productivity growth and the the weakness of the banking sector. The withdrawal of low interest rates in the UK and the US could also undermine much of the progress made since the recession should it be misshandled by central banks and treasury policymakers, it said. Osborne said: "I agree with Christine Lagarde that we need to be alert to the build-up of debt in the housing market. We need to be alert when we see house prices rising. I have given the Bank of England tools to do the job, and they should not hesitate to use those tools if they see these developments turning into a risk to the British economy."
The Washington DC-based organisation said: "House price inflation is particularly high in London, and is becoming more widespread. So far, there are few of the typical signs of a credit-led bubble. Lagarde called on the Bank of England to deploy "macro-prudential" measures to address the financial risk, including potential caps on loan-to-income and loan-to-value mortgage ratios. Later this month, the Bank's financial policy committee (FPC) will announce whether it is taking action to cool the market in the wake of a warning from deputy governor Sir Jon Cunliffe that it was the brightest of "blinking warning lights" of risk.
"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," it added. Lagarde said action should be taken "in a gradual, flexible way" to see whether the measures worked. "Clearly it is something that needs to be watched and depending on circumstances, on pricing levels, those macro-prudential measures should be further activated if necessary."
Lagarde also questioned the Help to Buy scheme, which has subsidised mortgage deposits, mostly for first-time buyers. Published in the same week that the Nationwide building society reported record average house prices, the IMF report said that the property market remained one of the major threats to the recovery, alongside poor productivity growth and the weakness of the banking sector. The withdrawal of low interest rates in the UK and the US could also undermine much of the progress made since the recession should it be mishandled by central banks and treasury policymakers, it said.
She recognised that the programme allowed "creditworthy lower-income households to purchase homes, especially outside London and the south-east" and it unlocked cheaper credit for lower income borrowers. It said: "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."
However, she warned that a "significant increase" in take up should sound alarm bells and "the Treasury may wish to consider whether it should be modified or even remains necessary for the full three years of the policy. And as the volume of high loan-to-value transactions rises, the financial policy committee will need to evaluate if the programme is contributing to financial risks". Treasury officials are understood to be confident that restrictions on home loans will cool the market over the coming months without the need for a hike in interest rates.
The financial policy committee, an arm of the Bank of England, has already urged regulators to be vigilant about homebuyers stretching their finances to purchase a property. Lagarde said the UK's mix of tax rises and spending cuts was "appropriate", but argued that the export sector remained weak and in need of a boost.
Treasury officials are understood to be confident that restrictions on home loans will cool the market over the coming months without the need for a hike in interest rates. New figures from Nationwide showed a slowing of price rises at 0.7%, lower than the 1.2% recorded in April. Also the building society's three-month growth figure, which gives a less volatile picture of the market than month-on-month comparisons, also fell, from 2.5% in April to 2.3% in May. That brought it to the lowest level since August 2013. Osborne said the UK economy was "firing on all cylinders", but the coalition needed to "work through our plan to eliminate the deficit and move this country into surplus".
The IMF has voiced concern in the past over the UK's path out of recession. Earlier this year, its chief economist, Olivier Blanchard, said that while growth had rebounded more strongly than anticipated on easier credit conditions and increased confidence, "the recovery has been unbalanced, with business investment and exports still disappointing". The IMF has voiced concern in the past over the UK's path out of recession. Last year, its chief economist, Olivier Blanchard, controversially accused Osborne of "playing with fire" by maintaining spending cuts as economic growth faltered at the time, with Lagarde's assessment on Friday confirming a full retreat from Blanchard's stance.
The booming housing market has concerned most economists. Prices have rocketed in London and the south-east while hotspots around the country have also recorded strong house price rises. "I am happy to come back yet again and say that we had clearly underestimated the growth of the UK economy in our forecast a year ago," she said.
Earlier this week, Nationwide reported a 13th consecutive month of house price rises, sending the cost of an average UK home to £186,512 – more than the previous peak reached in October 2007 before the financial crisis took hold and the overall housing market started to go into freefall. But the latest report said it expected the recovery to continue beyond next year, though not at the current rate of more than 3%.
The latest IMF report said it expected the recovery to continue over the next few years, though not at the current rate of more than 3%. Lagarde also used Friday's news conference to rule herself out of the race to be president of the European commission, insisting: "I am not a candidate." The possibility of her taking the EU's top job had reportedly been discussed by German chancellor Angela Merkel after David Cameron made clear Britain's opposition to the front-runner, Luxembourg's former prime minister Jean-Claude Juncker.
The IMF report said: "Good macroeconomic performance is expected to persist. Real GDP growth is projected to remain strong this year, before gradually returning to trend rates, driven by further rebalancing toward business investment and a gradual recovery in productivity. Inflation is expected to revert to target."
The IMF urged the Bank of England to maintain low interest rates to maintain the recovery, a stance that will dismay many economists in the City who want an immediate hike to cool the housing market.
"Monetary policy should stay accommodative – for now. With inflation below target, contained cost pressures, and excess supply, monetary policy should remain on hold."