You are here: Home - News -

BoE’s Broadbent eases fears over ‘unsustainable’ mortgage and household debt

  • 23/01/2019
  • 0
BoE’s Broadbent eases fears over ‘unsustainable’ mortgage and household debt
Bank of England deputy governor Ben Broadbent has sought to ease concerns that UK mortgage and household debt is unsustainably high.


Delivering a speech at London Business School, Broadbent (pictured) suggested mortgage lending was unlikely to grow rapidly in the coming years and argued that regulations had been put in place to prevent fast growth in riskier lending.

He also noted that housing was currently comparatively cheaper than government debt and that interest rates were likely to remain well below levels to cause households concern.

Broadbent acknowledged that unlike consumer loans and credit card debt, mortgage loans are still significantly higher than 25 years ago.

However, he highlighted that mortgage interest payments are well below the pre-crisis average needed to stabilise the economy

Interest rates “would have to rise a long way – and certainly by a lot more than is currently priced into government bond markets – even for household interest payments to return to that average,” he said.

“The fact that mortgage debt is higher than it was a generation ago doesn’t make it ‘unsustainable’.”

He added that in a crude comparison housing is currently ‘cheaper’ than government debt.

“When this spread is high, it’s telling you that, unless you think rental prices are going to weaken, it’s prospectively cheaper to buy a house than rent one,” he said.


Improbable mortgage debt growth

Broadbent added that if relatively weak economic growth was likely to persist, it was a reasonable expectation for the same to apply to rental prices.

And with greater uncertainty about rising house prices, homebuyers might want an additional discount, relative to rents, to buy a house.

“All this is why it seems to me improbable that aggregate mortgage debt will grow that rapidly over the next few years,” Broadbent said.

He continued: “People coming into the housing market, and trading up it, are unlikely to have to pay (or therefore borrow) much more than their predecessors did, several years earlier.

“This makes it slightly puzzling to read (as one often does) that household debt is “unsustainably” high. This view is ubiquitous.”


Rapid debt growth

Broadbent concluded his speech by noting that financial distress in economies, such as during the financial crisis, was often preceded by rapid debt growth.

“By contrast, comparative levels of debt – at very different points of time, across countries and even for individual households in the same country – are much less informative,” he said.

The limits on high loan to income lending were therefore introduced “not so much because the level of mortgage debt is higher than in the past but as a prudent protection – a guardrail, if you will – against the risk of a deterioration in credit quality and excessively rapid growth in the stock of debt,” he added.


There are 0 Comment(s)

You may also be interested in