UK's record-high housing prices not a threat to overall economy because low rate of transactions will prevent prices from decreasing, says Pimco fund manager

LONDON , May 28, 2014 () – The U.K. property market doesn’t pose a significant risk to the economy because low transactions will support prices, said Mike Amey, a fund manager at Pacific Investment Management Co.

“We would view housing as one of the risks, we don’t think it’s going to be a major problem,” he said at a press briefing in London today. “To decree a bubble you have to believe that there’s going to be a sharp reversal in prices and that’s hard to see” in the absence of large Bank of England interest-rate increases.

The housing market has evolved into BOE Governor Mark Carney’s biggest challenge, as record-high prices raise concerns among economists and officials that a bubble with London at its core is forming. The BOE’s Financial Policy Committee is widely expected to take action to cool activity next month. Officials will publish their assessment of the risks on June 26.

Carney said last week that weak housing supply has created “deep, deep” structural problems in the property market. Until banks are fully recapitalized they won’t be able to finance the new housebuilding needed to lift transactions, and that will support values, Amey said.

“This should be a warning to us all,” he said. “It remains likely that prices will continue to take the lion’s share of the improvement in U.K. housing sentiment.”

More than four-fifths of 28 economists in a Bloomberg survey published last week said the property market is at risk of overheating. Prices are surging about 10 percent a year, driven by gains in London.


Affordability Measures


The average first-time buyer in the capital borrowed 3.83 times their gross income in the first quarter, more than the 3.42 U.K. average, the Council of Mortgage Lenders said today. Mortgage advances in London fell 13 percent from the final three months of 2013, though are still up 22 percent from a year earlier.

Data yesterday showed mortgage approvals fell in April to an eight-month low. Amey said today there’s evidence new rules requiring borrowers to prove they can keep up their payments even when interest rates rise may have slowed transactions.

He said it would be “odd” if the BOE were to refrain from taking measures to tame the property market either next month or in September. Once interest-rate increases start, house-price growth will cool to about 3 percent to 5 percent, he said.


Restraint Pleas


A government incentive program, record-low benchmark borrowing costs and an economic recovery are stoking the property market. The BOE has pledged to keep the key rate at 0.5 percent until spare capacity has been used up, and increases, when they come, will happen gradually.

Nationwide Building Society, the U.K.’s biggest customer- owned lender, today reported a 31 percent jump in gross mortgage lending in the year through April 4. Chief Executive Officer Graham Beale said that while the London housing market is surging, prices outside the capital are still below pre-crisis levels.

“All regions are now experiencing some growth, but the big increases are mainly centered on London and the southeast and there are few signs of affordability being stretched in other U.K. regions,” he said in a statement. “We expect the U.K. economy to continue to improve over the coming year. Despite this improvement, we do not expect the Bank of England base rate to rise imminently.”

His call for restraint from the BOE was echoed by the CML, whose members represent 95 percent of all residential mortgage lending in the U.K.

“We are increasingly looking at not one overall U.K. housing market, but many smaller regional markets with different characteristics, and Greater London has particular challenges,” said Director General Paul Smee. “Affordability remains a crucial factor, and policymakers need to be aware that any measures they implement may have different effects in different locations.”


To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Andrew Atkinson, Fergal O’Brien

* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.