“Historically households usually spend about 25pc of their income on mortgage repayments,” says Andrew Wishart, UK property economist at Capital Economics.
“Unlike in 2007 and 1989, when affordability became stretched and there were big corrections in house prices, that remains the case now. So we do not think that we are in bubble territory because mortgage rates are low.
However, he says that if interest rates do rise significantly there would be a greater chance of a correction. “That’s not something we see in the next couple of years assuming the economic recovery continues to progress well, but it would increase the longer term risks. And given the history of the UK housing market, it seems unwise to rule a correction out at some point.”
“Indeed, the [Bank of England’s] Financial Policy Committee has hinted it was considering easing mortgage lending regulations this summer. That seems unwise. If strong house price growth were sustained and the lending rules weren’t biting, the Bank of England may then consider tightening them. Earliest that would be is probably July 2022.”
Fears of an overheated market are taking some back to 2014, when the Bank of England was given legal powers to rein-in mortgage lending after George Osborne warned that Britain’s roaring housing market posed a threat to financial stability.
The tools put in place that year to guard against risks from the housing market – affordability tests and so-called loan to income flow limits for lenders – are still in place. While stress tests of the banking sector have shown it can cope with a 30pc fall in property prices, the Bank announced in December that it would review both of these measures to see if they were still appropriate.
It said earlier this year that the 2014 changes “continued to guard against a significant increase in the number of highly indebted households,” suggesting no major overhaul is on the cards.
However the Bank’s deputy governor Sir Dave Ramsden told the Guardian on Tuesday that officials were keeping a close eye on the booming housing market and its potential risks. Housing experts have not ruled intervention out.
“When the Bank of England says it is watching the housing market closely, everyone should take notice. If house price growth fails to cool, don’t be surprised to see some form of intervention by the Bank, but the jury remains out regarding what form may be used,” says Hopper. “Of the two levers the Bank can pull to rein in an overheated market, the best-known, interest rates, would be a hammer to crack a nut.
“Putting up interest rates by even 1pc could slam the brakes on, cause house prices to fall and send shockwaves across a still fragile and recovering economy.”
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