IMF warns UK government over housing bubble risk

IMF managing director Christine Lagarde: 'Risks looming on the horizon'

Related Stories

The International Monetary Fund (IMF) has warned the government that accelerating house prices and low productivity pose the greatest threat to the UK's economic recovery.

It said rising property values could leave households more vulnerable to income and interest rate shocks.

It also called on the Bank of England to enact policy measures "early and gradually" to avoid a housing bubble.

In April, the IMF said the UK economy would grow by 2.9% in 2014.

The Fund's annual health check of the UK economy found it has "rebounded strongly and growth is becoming more balanced" adding economic growth would "remain strong this year."

It is a significant turnaround from last year when the IMF's chief economist Oliver Blanchard appeared to have a public falling out with the chancellor after he criticised the government's austerity policies.

This year IMF managing director Christine Lagarde admitted the Fund "got it wrong" in its assessment adding that while the UK's economic recovery began with consumer spending, it was now rebalancing towards an "investment-led recovery".

The chancellor said the IMF was "right to warn the government that risks still remain" to the UK's economic recovery.

Ms Lagarde called on financial regulators to consider imposing limits on the number of low-deposit mortgages a bank or building society can advance to borrowers, highlighting fears that some people may be at risk of overstretching their finances.

The IMF report said: "House price inflation is particularly high in London, and is becoming more widespread. So far, there are few of the typical signs of a credit-led bubble.

"Nonetheless, a steady increase in the size of new mortgages compared with borrower incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks."

It added: "Macroprudential policies should be the first line of defence against financial risks from the housing market."

It said that raising mortgage lenders' capital requirements "would build additional buffers against increased exposures to the housing sector".

Help to Buy

The Bank of England's Financial Policy Committee (FPC) is due to meet later in June and could announce measures to control mortgage lending.

In May, 25% taxpayer-backed Lloyds Banking Group said it would limit its mortgage lending to four times a borrower's income on loans above £500,000.

On Tuesday, Royal Bank of Scotland - which remains 80% taxpayer-owned - said it would also restrict the amount it advanced to mortgage borrowers.

Bank of England governor Mark Carney The IMF has warned the Bank of England against raising interest rates too soon

The IMF added the government should consider modifying or even pulling the plug on its flagship mortgage guarantee scheme - known as Help to Buy 2 - if house prices showed signs of overheating.

Recent figures from the Treasury showed 7,000 homes were bought through the Help to Buy scheme between its launch in October and March.

That amounted to just over £1bn of mortgages since the scheme's launch, involving just £153m of government guarantees.

Howard Archer, chief UK and European economist at IHS Global Insight, has previously warned the risk of a house price bubble developing across the UK is "very real".

Earlier the chancellor told BBC Radio 4's Today programme: "We need to be alert to the build-up of debt in the housing market, we need to be alert when we see house prices rising."

"We have created - this government, me as chancellor - the mechanism to deal with that,

"We have given the Bank of England the tools to do the job and they should not hesitate to use those tools if they see these developments turning into a risk for the British economy."

Interest rates

While the IMF praised the Bank of England's policy of forward guidance, it warned that if economic growth expanded more than current forecasts suggest, interest rates might have to rise more quickly in order to control inflation.

Bank governor Mark Carney has previously stated that he envisages interest rates rising from their historic low of 0.5% incrementally and not before the middle of 2015.

The IMF also echoed the Bank of England's own concerns about productivity levels, saying that despite evidence of the UK economic recovery strengthening, productivity growth remained low.

John Stewart from the Home Builders Federation said the scheme meant more houses were being built

It added "Accelerating productivity growth would spur investment and output, while allowing real wage increases without triggering inflation. If productivity continues to be flat, however, growth will eventually stall."

Productivity reflects the amount and value of the goods and services produced by an employee of a company. But productivity depends partly on business investment.

In February, the Bank of England said there was still a significant amount of "slack" in the economy, meaning that it was not growing to its full potential because of underinvestment.

It estimated the amount of slack in the economy was equivalent to about 1% to 1.5% of gross domestic product (GDP).

Earlier, the Office of National Statistics showed the UK's trade deficit with the rest of the world - the different between the value of the goods and services the country exports and imports - widened in April to £2.5bn.

The UK's goods deficit widened in April to £9.6bn from £8.3bn in March and £8.5bn a year earlier, denting the chancellor's hopes of boosting exports in an effort to rebalance the economy.

More on This Story

Related Stories

More Business stories


BBC Business Live

    06:30: STOCK MARKET Radio 5 live

    Jane Foley, senior currency strategist at Rabobank is on 5 live talking about the falling stock market. "If we see stocks fall more we may see companies bargain hunting," she says. So more firms may start purchasing each other.

    06:21: HEATHROW TRAVEL Radio 5 live

    Travel writer Simon Calder is on 5 live talking about the weather. He says he sees about 50 weather-related cancellations at Heathrow, so perhaps about 5% of flights so far. Flights to Frankfurt look hard to come by, he says.


    Heathrow airport has said this morning that around 10% of flights will be cancelled today as the remnants of Hurricane Gonzalo hit the UK. Flights with the 20 biggest carriers would be affected, it says. British Airways has already cancelled some ahead of the expected severe weather. The remains of the hurricane are predicted to bring heavy rain and gusts of up to 75mph in some areas, causing disruption to rush-hour travel. If you're travelling today it's worth checking before you arrive at the airport.

    06:02: TOTAL CEO DEATH Radio 5 live

    Christophe de Margerie, the chief executive of French oil company Total, has died in an air crash in Moscow. Sarah Rainsford, the BBC's correspondent in Moscow says poor weather with low visibility is a possible cause of the crash. His plane crashed when it collided with a snow-clearing machine killing him and three crew, she tells 5 live.

    06:01: Howard Mustoe Business reporter

    Good morning! Get in touch via email or on twitter @BBCBusiness.

    06:00: Matthew West Business reporter

    Morning folks, we have the latest public borrowing figures out at 9:30 today. But before that we have full year results from online retailer ASOS, and interim figures from Whitbread, plus the weather is promising to play havoc with the transport network today with 10% of flights out of Heathrow already cancelled this morning. We'll bring you everything as it happens.



From BBC Capital


  • Ade Adepitan at the ColosseumThe Travel Show Watch

    The challenge of providing disabled access at Europe’s leading ancient monuments

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.