Rising UK house prices cited as greatest risk to UK economy by Bank of England Governor Mark Carney; potential policy responses include imposing more checks on affordability of mortgages, limiting loan types, reining in government Help to Buy program

LONDON , May 19, 2014 () – Bank of England Governor Mark Carney shifted closer to reining in surging U.K. home prices by branding them the No. 1 risk to the economy and listing potential policy responses. In his most forthright warning yet over the property market, Carney said policy makers “could do more” to tackle excesses if needed. Options include imposing more checks on the affordability of mortgages, limiting types of loans or advising the government to rein-in its Help to Buy program.

“All those things are possibilities and we will consider them all,” Carney said in an interview with Sky News’s “Murnaghan” show yesterday. “The biggest risk to financial stability, and therefore to the durability of the expansion, those risks center in the housing market and that’s why we are focused on that.”

Just four weeks before the Carney-helmed Financial Policy Committee convenes to assess the housing boom, it received fresh incentive to act today as Rightmove Plc reported average asking prices rose 3.6 percent across England and Wales this month. The biggest rise since 2002 propelled prices to an all-time high of 272,003 pounds.

Housing is the Bank of England’s most significant domestic concern now that the economy is improving and inflation is under control. Among other risks, Carney noted sterling’s strength is creating “real challenges” for both exporters and the balance of the U.K. expansion, while he warned recent low volatility in financial markets could eventually adjust sharply.

Structural Problems

His analysis that there are “deep, deep” structural problems in the form of weak housing supply was echoed across the political spectrum albeit with clashes over how much the government is doing.

Also speaking on Sky News, Prime Minister David Cameron said “fundamentally we need to build more homes” and that his government is encouraging that. Deputy Prime Minister Nick Clegg said on BBC Television’s “Andrew Marr Show” that the government should “pare back” its Help to Buy program if Carney advised doing so.

Ed Balls, Labour Party Treasury spokesman, said the government should do more to spur building, as well as reduce the top value of homes that can be purchased under the Help to Buy initiative.

Interest Rates

“Unless the government acts, the danger is that the Bank of England will be forced to raise interest rates prematurely,” Balls said in a statement.

The central bank needs to ensure that lenders are strong enough to make loans and that mortgages are loaned to borrowers that can afford them, Carney said in the interview. The gain in prices is broadening and may also be fueling the need for large mortgages of more than four times borrowers’ salaries, he said.

“We would be concerned if there were a rapid increase in high loan to value mortgages across the banks,” he said. “If that were much more generalized and particularly if it were accompanied by very high loan to income ratios, we’ve seen that creeping up and it’s something we’re watching closely.”

Affordability tests came into force in the U.K. last month, requiring borrowers to prove they can afford repayments even when interest rates rise in line with market expectations. After its March meeting, the Financial Policy Committee said a tool to make the tests more stringent will be available as soon as June.

The Bank of England could also recommend the government curtails its Help to Buy program. It offers a mortgage guarantee that allows the purchase of both newly built and existing homes costing as much as 600,000 pounds with a down payment as low as 5 percent.

“It’s a pretty targeted program, it’s a relatively small program at this point but it could grow a lot and it could change attitudes in other parts of the mortgage market, that’s why we have to be vigilant,” Carney said.

Policy makers wanted to avoid the “build up another big debt overhang that is going to hurt individuals and is very much going to slow the economy in the medium term,” he said.

To contact the reporters on this story: Oliver Staley in London at ostaley@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Tuhin Kar, Zoe Schneeweiss

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