The IMF warns over housing bubble
The IMF said the UK’s economy has rebounded strongly and growth is becoming more balanced, suggesting that the recovery has momentum.
It also said that the good macroeconomic performance is expected to persist.
However it believes the housing market presents a risk to this outlook: “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. 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.”
The IMF believes that monetary policy should stay accommodative for now but it might have to be tightened quickly if costs run ahead of productivity growth, slack is absorbed, or financial stability concerns cannot otherwise be addressed.
It said: “Some measures have already been taken. In particular, the Funding for Lending Scheme has been refocused towards businesses, with emphasis on SME loans, while household lending is no longer eligible for additional borrowing allowances.
“Underwriting standards for owner-occupier mortgages have been tightened to ensure better borrower protection.
“But in an environment where expectations of capital gains can quickly drive up household indebtedness—and thus systemic risk for financial institutions—more policy action is warranted.”
The IMF said limits on the proportion of high loan-to-income mortgages any lender can issue would help to contain directly the most pressing risks to financial stability but, if such limits prove insufficient, outright caps on LTIs or loan-to-value ratios may need to be considered.
Highlighting what it described as the UK’s “inadequate housing supply”, the IMF singled out Help to Buy as something George Osborne and the government needs to keep an eye on: “The program has played a role in unlocking mortgage credit for lower-income borrowers from other sources. If these flows increase significantly, the FPC and the Treasury may wish to consider whether H2B should be modified or even remains necessary for the full three years of the policy.
“And as the volume of high-LTV transactions rises, the FPC will need to evaluate if the program is contributing to financial risks.”
Commenting, Chancellor George Osborne said: “This year the IMF forecast that the UK will be the fastest growing major advanced economy in the world.
“But we must not be complacent. And the IMF today reminds us that there is a long way to go – and many risks to our recovery…
“I also agree with the IMF that we need to remain vigilant for any risks that might emerge in the housing market.
“That’s why I have given the Financial Policy Committee new macro-prudential tools should they see a risk to financial stability – and as I’ve made clear that includes recommendations to me on the parameters of the Help to Buy scheme.
“The only long term answer to Britain’s housing problems is to build many more houses in this country.
“That’s why we’ve reformed our planning laws – with new permissions rising and house building up a quarter over the last year.
“But the biggest risk to our recovery would be to abandon the economic plan that is working.
“This for me is the most important conclusion.
“Today’s IMF report shows that our long term economic plan is the right one.”