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FPC could constrain mortgage debt if drivers of housing market persist – Cunliffe

  • 20/05/2021
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FPC could constrain mortgage debt if drivers of housing market persist – Cunliffe
The Financial Policy Committee could move to constrain household mortgage debt if strong demand, favourable credit conditions and fast house price growth continue, a Bank of England (BoE) policymaker has said.


In a speech at the Law Society Property Section Convention today, John Cunliffe deputy governor, financial stability at the BoE, and Monetary Policy Committee member (pictured), said it was unclear as to how the “awakening,” of the housing market would affect aggregate indebtedness – the money owed by households – and the Financial Policy Committee’s (FPC) subsequent measures. 

In 2014, the FPC limited the flow of high loan-to-income mortgages and introduced stress rate tests for new borrowers. This was done in response to evidence showing household debt had resulted in a longer and deeper recession following the 2008 financial crisis.

“Since the introduction of the tools the housing market, outside London, has been relatively quiet by UK standards,” Cunliffe said.

He added: “If, however, the self-reinforcing dynamics of past periods began to re-emerge – strong demand, fast growth of prices relative to incomes, easy credit conditions and high levels of transactions – the FPC’s measures would certainly begin to have a stronger impact in constraining the increase in aggregate mortgage indebtedness.”


Persistent drivers

In the speech, which focused on subdued house price growth over the decade to 2020, particularly outside of London, and compared it to the current property boom, Cunliffe said, “persistent drivers,” would uphold the sector’s performance.

He said: “One would expect the market to cool down when public support to the economy in general and the housing market in particular is withdrawn over the course of the year, as is currently planned.  

“Previously, we’ve seen transactions spike prior to the end of stamp duty holidays, followed by a brief trough before transactions start to recover, consistent with a large share of the impact coming through shifts in the timing of transactions, rather than an aggregate increase in demand.”  

Cunliffe added: “But there may also be some reasons to believe that the recent increase in demand for housing, and perhaps the composition of that demand, which has driven the UK market in recent months, reflects some more persistent drivers and that the market will not fall back to its pre-pandemic decade performance when the tax incentives have gone.” 

He said the structural change to working practices due to remote working throughout the pandemic would lead to a preference for larger homes, with less considerations for commuting times. 

Cunliffe also said the need to live in city centres would drive “credit constrained,” renters away from high cost areas to more affordable parts of the UK. 

Rising property prices outside of the capital could also reverse decades of usual property trends and see the gap between the prices of London properties and other high cost areas narrowing, he said. 

This echoes the recent Rightmove house price index, which showed prices in London had only risen by 0.2 per cent in May, compared to other areas which saw double digit increases. 

Although Cunliffe noted it was not possible to use pandemic behaviour to predict post-pandemic outcomes, he added: “Even if prices rise in newly popular locations and the volume of mortgage transactions increased, there could be offsetting effects.  

“First-time buyers of properties outside high cost metropolitan areas, who would otherwise have bought in those areas, would take on less debt than they would otherwise have done. And, existing owner-occupiers who moved from such areas to other areas in the UK, might in fact reduce their debt in doing so. Supply may also be more able to respond to demand outside city centres.” 

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