Bootle, speaking at the Tenet Group conference in London, said that despite a prolonged period of low interest rates the current earnings to mortgage payments ratio was only slightly below historical averages.
He warned rising interest rates would cause a spike in the number of borrowers unable to cope.
“If you look at affordability, the percentage of a person’s income that they pay out on a mortgage has been comfortable at the long-term average and is currently just below. But it should be below given the base rate is at 0.5%, what do you think it will be like when there are normal rates of 5% or 6%?
“Mortgage rates will be 7% , 8% or 9% and it will look rather different, a lot of people would find themselves incapable of servicing their mortgages at that sort of level of interest rates.”
Bootle later turned his focus to the housing market and said the link between house prices and earnings had drifted but higher interest rates would see this return to normal levels.
“This has important implications,” he warned.
“Somewhere in the future, not this year or even next year, but between four and five years’ time, we will have of two events. We are either going to have a housing market crash with big falls in house prices sustained over a long time to get this ratio back to normal.
“Or the government is going to preside over a period of higher inflation, including higher wage inflation, accompanied by a weaker exchange rate in order to bail the market out and restore this relationship without house prices falling. I think we will see one of those two things.”
“The next couple of years will be fine but in the medium term I think this is a market that is overvalued and is going to have a significant adjustment unless bailed out by higher inflation.”
Bootle said he expected Base Rate would rise by the end of 2015 and that some sectors of the market were overplaying the Bank of England governor’s forward guidance.
“I think markets are getting it wrong. They are being overly simplistic in their interpretation of forward guidance and they’re being overly alarmist about the idea the economy is growing again when we’re not yet back to the output level of 2008.
“Mark Carney is one of those people who is, quite rightly, fully behind the idea that this economy needs a sustained recovery. As long as he thinks that’s not threatening financial stability or an upsurge in inflation he will keep rates low.”
