Warning shots were fired across the UK housing market by the International Monetary Fund (IMF) last week, as it released its economic assessment of the UK. It warned of a possible housing price bubble, and associated potential problems.
Although levels of secured and unsecured household debt are comparable to the peaks that have been seen in the past, the report said: ‘Debt service ratios are much lower than in the late 1980s and early 1990s, reflecting the substantial decline in nominal and real interest rates.’
The real risk, according to the IMF, is from the ‘external and domestic uncertainties’ which could create problems if interest rates were to rise as a result.
IMF directors therefore ‘called for heightened vigilance to these risks by the authorities, especially regarding the possible existence of a housing price bubble with its potential deflationary consequences.’
Despite these concerns, Phil Jenks, head of mortgages for the UK’s largest mortgage lender, HBOS, said he expected any move in interest rates in the near future to be down.
However, he was not worried that such a move would lead to mortgage borrowers taking on levels of debt they could not support when interest rates moved back up in the medium term as is expected.
Jenks said although people were borrowing more than ever before, they were also paying off debt faster than ever. Indeed he said the mortgage industry’s innovative approach to product design had made debt re-payment easier for many with flexible mortgages, daily interest calculations and shorter mortgage terms proving effective.
Jenks said average loan to values (LTV) had fallen at Halifax and commented: ‘We are not under pressure from intermediaries to increase income multiples as we were in the late 1980s, suggesting consumers are not stretching their finances.’
Andrew Clare, economist at Legal & General, accepted there were potential problems. He said: ‘We are all aware there are significant imbalances in the UK economy.’
While the consumer and manufacturing sides of the economy remained at odds with each other, he said the economy would always be more at risk to being knocked off kilter. Although Clare said a future interest cut may widen this gap further he did not expect house prices to crash.
n The IMF is an international organisation of 184 member countries. It was established to promote international monetary co-operation, exchange stability and to foster economic growth and high levels of employment.