Threat of housing bubble tempts Britain to act

Concerns are mounting that the country’s housing market is overinflated, with London house prices rising almost 19 percent in the year to April. Bank of England Governor Mark Carney has described the situation as the greatest risk to the economy. The International Monetary Fund is worried. Ditto European Union officials.

The pressure is on to act now rather than risk having it all come crashing down later, dragging Britain back into recession. A Bank of England committee set up in the wake of the economic crisis to ensure financial stability is widely expected to take action Thursday to cool the market.

The move will be of interest globally, as its outcome will shed some light on how much a central bank can keep a specific sector from overheating without putting the brakes on the economy as a whole.

“This may not be the mother of all house price bubbles, but it may be the sister,” said David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee who now teaches at Dartmouth College in New Hampshire. “Does it make any sense for the economy? The answer has to be no.”

Driven by interest from wealthy investors, an improving economy and pent up demand in a country with a chronic housing shortage, house prices rose 18.7 percent in the capital and about 10 percent in the rest of the country in the year ending in April, according to official statistics. That far outstripped the 0.7 percent increase in wages including bonuses during the same period.

That means Britons have to borrow more to buy a home. Homeowners in Britain often get new mortgage loans every two or three years to take advantage of fluctuating markets — rather than a fixed longer-term system common in the United States. Carney recently described over-extended borrowers as a threat to the financial system, largely because households make up the bulk of domestic borrowing.

“History shows that the British people do everything they can to pay their mortgages,” Carney said in a speech this month. “That means cutting back deeply on other expenditures when the unexpected happens, potentially slowing the economy sharply.”

Figures from the Organization for Economic Cooperation and Development, a policy watchdog for the 34 most developed countries, suggest property prices in Britain are about 30 percent too high when compared to wages. In the United States, by contrast, most homes are valued correctly while Japan remains the cheapest market among OECD members after years of deflation.

The froth can be seen in the explosion of real estate agents. In a country where neighborhood retail shops often struggle to survive, realtor shops are a fixture, particularly in desirable neighborhoods.

PricedOut, a group that campaigns for affordable house prices, says people with steady but modest jobs — nurses, teachers and engineers — have little hope of buying a home, especially in the south. In Oxford, Britain’s least affordable city, the average house price — at about 340,000 pounds ($578,000) — costs 11 times gross average earnings, according to the Lloyds Bank Affordable Cities Review.

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