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Capital Economics: BoE will step in if boom spreads out of London



By Devraj Ray


Bubble bursting with finger

The Bank of England will step in if it looks like the housing boom in London is spreading to other parts of the country, according to economists at Capital Economics.

Figures from the Office for National Statistics, published today, show house prices in the capital rocketed 17.7 per cent in the 12 months to February, to reach an average of £458,000, fuelling a jump in the UK average to £253,000 – a 9.1 per cent rise from a year earlier.

Stripping out London and the South East, prices rose by an average of 5.8 per cent in the year to February to an average of £196,000, up from £186,000 a year earlier.

On a country-by-country basis, price rose in England by 9.7 per cent to £264,000, from £247,000 a year earlier. Wales saw its average property price grow 5.3 per cent from £160,000 in February 2013 to £167,000 in February this year. Scottish prices rose 2.4 per cent in the year to February, from £178,000 to £183,000, while Northern Ireland saw slightly higher inflation of 2.8 per cent, with the average price rising from £125,500 to £130,000.

Shortly after the Mortgage Market Review is introduced, lenders will be forced to consider any Financial Policy Committee – part of the BoE – recommendations, on top of market expectations of base rate, when setting the levels of their interest rate stress tests.

In February, BoE governor Mark Carney admitted there was little the central bank could do to control prices in the capital due to the high proportion of cash buyers at the top end of the market.

In its quarterly housing market report, Capital Economics says the BoE will use this power if it sees signs that the bubble is spreading out of London to other parts of the country.

The Capital Economics report says: “If the house price boom was to spread beyond London, the Bank of England would respond by making use of its new macro-prudential powers.

“The request for a new power to impose a tougher mortgage interest rate stress test than that soon to be required by the MMR seems to have focused lenders’ minds – they are planning on approving a smaller share of mortgage applications over the next three months.”

Legal & General mortgage club & housing director Stephen Smith warns against using policy tools that will slow growth in other parts of the country other than London.

He says: “Whilst there has been a lot of commentary around house prices in the capital, policy makers cannot make decisions that will impact the whole country based simply on what is happening in London.

”The Government needs to maintain a balancing act between stimulating growth in some areas and ensuring that London and the South East don’t become unaffordable to families.”

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