ScotiaBank global banking and markets director Alan Clarke raised the alarm while giving evidence to the Treasury Select Committee.
He told MPs the fact 70% of outstanding debt is linked to the Bank Rate makes him uneasy: “It is easy to revert from a fixed-rate mortgage or a legacy tracker onto a lender’s standard variable rate. It requires zero effort.
“But inertia holds people back from digging out their bank statements and payment slips – and there are fees to get onto a new fixed rate product. That requires effort.”
An increase in the Bank Rate to 3% or other monetary policy interventions could hit borrowers’ abilities to repay debt, he said. “There is the opportunity to lock into low fixed-rate deals but inertia makes you slightly worried that if leverage ratios go up there will be a time bomb ticking,” he warned.
Clarke also predicted growth could slow down in 2015: “Where I’m more nervous is the sugar rush for the housing market and consumer gets tired legs.”
Nevertheless, he insisted growth supported by the housing market was better than no growth at all. “I accept it is risky, I accept it is housing that got us into this mess, but we are growing,” he said.
Clarke was speaking alongside Société Générale chief UK economist Brian Hilliard and Morgan Stanley UK economics vice president Melanie Baker on issues raised by last week’s Autumn Statement.
Hilliard said the trend of households taking on more debts is a sign of consumer confidence, but added: “I do get uncomfortable seeing so much of the improvement in the economy over the next few years is built on the housing market.”
He downplayed the impact of the Chancellor’s proposal to introduce Capital Gains Tax for overseas investors: “If it is flight capital I don’t think they are going to be worried about the extra taxes that are muted.”
Baker said “in theory” rising house prices will help the economy. The biggest risk to the economy is the return to tighter credit conditions, she said.
