Forever blowing bubbles?

In May, The CBI said it was on high alert over house prices amid fears that the booming market in London and the south-east was heading into a bubble. The business lobby group brought forward its forecast for the next rise in interest rates to the first quarter of next year.

A Bank of England rate-setter has said there is no cause for alarm over the housing market. Ben Broadbent, a member of the Bank’s monetary policy committee, said it was no surprise that the property market was recovering alongside the wider economy and that credit growth was not a worry. 

“What really matters is not just house prices per se but whether there is a lot of credit growth on the back of that. Currently there isn’t a great deal,” Broadbent told the BBC recently.

“It’s clearly something the Bank and the financial policy committee (FPC) will want to keep an eye on.”

Broadbent said the Bank had already acted to calm demand for mortgages by switching its Funding for Lending Scheme away from home loans to business lending. He added that the FPC, of which he is not a member, could impose measures to keep mortgage lending standards in check and ensure the size of loans compared with house values and incomes did not get out of hand.

Broadbent underlined the Bank’s view that when interest rates rise they would do so gradually and would probably peak below their level ahead of the financial crisis. He said the moderate pace of increase was more important than when the first rate rise arrived.

The FPC, whose job is to guard against risks to the financial system, meets later this month. Many economists expect it to take steps to control credit in the housing market as the economy expands.

However last week, according to Nationwide, the UK average house price hit an all-time high and yet the building society’s three-month growth figure gives a less volatile picture of the market, falling from 2.5% in April to 2.3% in May. That brought it to the lowest level since August 2013.

The index is based on mortgages approved by Nationwide during the month, and recent lending data has suggested that the introduction of tough new mortgage rules in April has led to a slowdown in the market.

According to The Guardian, commentators have said it is too early to say if the reduction in activity is temporary or marks the beginning of a cooling off.

Nationwide’s chief economist, Robert Gardner, said: “The underlying pace of activity should become more evident as we move through the summer months and the impact of MMR (mortgage market review) becomes clearer.

“However, with mortgage rates close to all-time lows and labour market conditions continuing to improve, underlying demand for homes is likely to remain strong.”

The next FPC meeting is on 17 June and the FSR (financial stability report) which may include measures relating to the housing market will be published on 26 June.

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