In a speech on Thursday evening Sir John Cunliffe, deputy governor of the Bank of England, said growing momentum in the UK housing market could end with a ‘sharp correction’. He said this could increase household indebtedness and threaten the long-term stability of the UK economy.
He said: “It would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year.”
His speech followed the release of figures from Nationwide which revealed UK house prices grew by 10.9% year-on-year in April.
Cunliffe noted that strong demand, weak supply and expectations of a rising market could lead to a period of powerful pressure on UK house prices.
He said: “There are many reasons for the failure of the supply of housing to keep up with demand in the UK which go well beyond the remit of a central bank. But the effect is that when demand grows strongly house prices can
keep rising quickly for a long time. This is a movie that has been seen more than once in the UK.”
While he noted the housing market could be in for a soft landing, with house price growth slowing, he said there could also be a major overshoot in prices.
The Bank of England and the Treasury have previously attempted to dampen the housing market by withdrawing cheap funding via the Funding for Lending Scheme, which was designed to incentivise banks to boost their lending to the real UK economy.
Whether and how to act further if momentum continues to build will be the most challenging judgement the Bank will have to take in the coming months, Cunliffe said.