- OBR warns ‘house price to income ratio has been growing for the last 40 years but that cannot go on forever’
- Bank of England says mortgages larger than four times salary at highest level since 2005
- House prices up £17k in a year, but wages rise just £417
The Bank of England will test how a house price crash and a sudden rise in interest rates would hit Britain’s banks, as the Treasury’s chief watchdog has warned of a potential property bubble.
A planned stress test on bank’s ability to deal with a property collapse was revealed in the Bank’s latest Financial Policy Committee statement.
The details arrived on the heels of Robert Chote, the head of the Office of Budget Responsibility, sounding a warning on the overheating property market in some areas and one of his counterparts saying house prices could not keep rising above wages forever.
Mr Chote told Treasury select committee MPs: ‘With very rapid house price increases in some parts of the country you might see bubbly activity where people are willing to buy stuff off plan or not intend to live in it.’
Fear: Robert Chote, who heads the Office for Budget Responsibility, has warned that Britain is on the verge of a dangerous housing bubble
The Bank of England said its decision to conduct a test was, ‘not an expectation of what would happen, but a coherent tail risk event,’ but, ‘a key part of the scenario would examine the resilience of the banks to a housing market shock and to a snap back in interest rates’.
Official house price figures from the ONS this week showed the average home had leapt £17,000 over the past year – yet at the same time the average wage has risen by just £417.
House price inflation at 6.8 per cent means the price of a home is rising almost five times faster than ONS earnings at 1.4 per cent.
With wages still rising slowly, house price inflation is being driven by homeowners taking on bigger debts.
Economist Steve Nickell, who works at the OBR with Mr Chote, said: ‘The house price to income ratio has been growing for the last 40 years but that cannot go on forever because everything you consume would become housing and there would be nothing else left.’
The Bank of England said mortgages larger than four times borrowers’ incomes accounted for the highest share of new home loans last autumn than at any time since 2005 – a period which includes the 2006 and 2007 peak of the property boom.
HOW MUCH IS LONDON DRIVING HOUSE PRICE RISES?
The ONS said London house prices were up 13.2 per cent in a year, while in the South East homes were up 7.1 per cent. With both London and the South East stripped out, house prices were up 3.8 per cent.
Some measures show house price rising even faster across the country.
The Bank of England said that an average of the Halifax and Nationwide indices recorded inflation of 10 per cent in the year to February 2014.
It added that mortgage levels were up 40 per cent over the past year but remained 20 per cent below long-term average levels.
Fears of an emerging property bubble have been downplayed by the Bank of England and Government, as while the bounce back in the property market has seen prices start to rise across the country, in many places increases are still muted.
But the property market in London and the commuter belt is roaring ahead, with estate agents reporting boom-time activity, large numbers of buyers chasing homes, rapidly rising asking prices, sealed bids and gazumping gripping some areas.
Buying agent Henry Sherwood recently told This is Money of ordinary properties in Islington and East London, where potential buyers were queuing to view and sales were made at 10 per cent above already high asking prices.
Mr Chote, told the select committee that while much of the property market’s resurgence could be considered normal, parts of the country could be overheating.
He said: ‘You can explain the increase in house prices by fundamentals without having to resort to saying there is a bubble going on. That doesn’t mean to say there may not be some bubbly components to what is going on in the housing market in particular parts of the country.’
The gulf between wages and house prices is a major concern to those who fear the grounds for a new property boom and bust are being laid.
Nationwide’s house price report measure shows the average property at almost 5.5 times earnings when the long-run average is just over four times earnings.
House prices never fell back to the long-term average during the financial crisis slump, whereas in previous downturns they have fallen below this.
The property market looks even more stretched if you set the ONS’ average earnings figures against its house prices statistics. Its measure put wages at £25,000 and the average house price more than ten times higher at £254,000.
Mr Nickell said: ‘A bubble arises when demand is being driven by people wanting to get in because of expectations of price growth rather than for somewhere to live.
Soaring: Official figures show the price of the average UK home hit £254,000 in January – a rise of 6.8 per cent in a year
House prices: a Royal warning
Worry: Prince Charles gave a separate warning yesterday that soaring prices in London will drive a generation of young people out of the capital
Prince Charles gave a separate warning yesterday that soaring prices in London will drive a generation of young people out of the capital.
He said the dream of home ownership was becoming further and further out of reach for swathes of workers.
The average price of a home in London is expected to jump from £458,000 to £650,000 over the next six years.
‘This isn’t sustainable and risks driving away talented young individuals who are starting their careers in London and spending most of their income on rent,’ said the prince.
‘Home ownership for this generation is seemingly becoming further and further out of reach.’