IMF urging Britain to act on bubble risk

The International Monetary Fund (IMF) has called on Britain to cool its housing market by reining in risky mortgages, the strongest warning yet from an international organisation about the risk of a property price bubble.

So far, there have been few signs of a credit-driven bubble in British house prices, the IMF said.

But that could change fast and lenders should offer fewer mortgages that are far larger than borrowers’ incomes, it warned in an annual report on Britain’s economy published yesterday.

IMF managing director Christine Lagarde called on the Bank of England to use its powers over bank lending “early and in a gradual fashion as the first line of defence against risks ... from the housing market”.

If efforts to rein in the market did not work, the Bank of England would need to be ready to raise interest rates fast, the IMF said.

Chancellor of the Exchequer George Osborne, who spoke at the same news conference as Lagarde, said he would stay vigilant over housing, and that the Bank of England should not hesitate to act if needed.

Two major British banks, Lloyds Banking Group and Royal Bank of Scotland, have already said they will no longer lend at multiples of more than four times a borrower’s income for mortgages of over £500,000 pounds (€616,000).

House prices have risen by more than 11% over the past year, according to one measure, the fastest rate since just before the financial crisis, powered by soaring London prices.

Bank of England governor Mark Carney said in May that housing was the biggest threat to Britain’s economic recovery.

The IMF said that more needed to be done now. “In an environment where expectations of capital gains can quickly drive up household indebtedness — and thus systemic risk for financial institutions — more policy action is warranted.”

On Britain’s economy more broadly, the IMF’s tone was much more upbeat than a year ago when the country seemed to be on the verge of falling back into recession. Some officials at the fund at the time said Osborne was too focused on cutting the budget deficit at the expense of growth.

Weak productivity was a risk to future growth, but overall Britain’s fiscal stance was now appropriate.

The IMF said that in the longer term, Britain had to build more houses. The Labour Party said the report showed how the government’s struggle to get more houses built meant interest rates might have to rise earlier than otherwise needed.

Andrew Sentance, a former Bank of England policymaker who has long called for tighter monetary policy, also said it was unclear how effective the Bank of England’s so-called macro-prudential tools to control bank lending would be in curbing house price risks.

- Reuters