United Kingdom Housing

United Kingdom

United Kingdom: Continued increase in house prices prompts Bank of England to intervene

June 3, 2014

According to the Nationwide Building Society (NBS), home prices in the U.K. rose 0.7% over the previous month in May, which marked the 17th consecutive rise. The figure was below the 1.2% increase recorded in April, but just barely overshot the 0.6% increase the market had expected. On an annual basis, home prices rose 11.1% (April: +10.9% year-on-year), which marked the strongest increase since January 2005. As a result, the average house price was GBP 186,512 (May 2013: GBP 167,912), marking the highest level on record.

According to the monthly NBS report, despite the year-on-year record-high increases, the housing market, “may be starting to moderate, with mortgage approvals in April around 17% below January’s high,” although it also stated that, “it is too early to say whether nationally this is indicative of a cooling trend in the wider market.” The NBS also added that, “the slowdown may partly be the result of the introduction of Mortgage Market Review (MMR) measures, which may take a few months to bed down,” and that the, “underlying pace of activity should become more evident as we move through the summer months and the impact of MMR becomes clearer.” According to the Financial Conduct Authority (FCA), which is the financial sector’s regulatory body, “[t]he MMR package of reforms is aimed at ensuring the continued access to mortgages for the great majority of customers who can afford it, while preventing a return to the poor practices.”

On 12 June, Chancellor of the Exchequer George Osborne said that he would give the Bank of England stronger powers to curb mortgage lending and reduce risks that the recent increase in housing prices pose to the stability of the financial system. The move came after recent concerns and discussions between the Bank and the Exchequer about which institutional body is responsible for preventing a housing bubble from forming. On the heels of Osborne’s announcement, the Bank announced a move aimed doing just that in its June Financial Stability Report that was released on 26 June. The Bank acknowledged an increase in the house price to earnings ratio in all areas of the United Kingdom, especially in London (although this ratio remains below pre-crisis peak levels in the capital), and stated that it will impose a limitation to mortgage approvals. According to the limitation, no more than 15% of all new mortgages can exceed more than 4.5 times a borrower's income. Moreover, the Bank asked lenders to implement stronger tests on borrowers’ repayment capability. The Bank is also concerned about the recent increase in loan to value ratios (LTV), although it partly attributed this to the Help-to-Buy guarantee scheme the government introduced in April 2013.


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United Kingdom Housing May 2014

Note: Average price of a typical property in the U.K. and seasonally adjusted month-on-month variation in %
Source: Nationwide Building Society (NBS).


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