Bank of England not concerned about UK property price rise

At a time when many experts across the UK property sector are highlighting the potential risk of a housing bubble in certain areas of the country, Mark Carney, the Governor of the Bank of England, has joined the conversation. Looking at official statistics he believes that ongoing house price rises in the UK are not indicating an imminent property price bubble and indeed many indicators associated with the UK property sector are well below the danger levels seen before the 2008 housing crisis.

On one hand it is comforting to see that the Bank of England is not concerned about UK property price increases although on the other hand there are concerns that this does give the green light to property investors to pursue more investment in the UK. This comes at a time when areas such as the London prime property sector are back to pre-2008 highs and other areas of the UK property market appear to be showing significant momentum with further price rises expected during 2013.

Mortgage applications

One of the key factors which the Bank of England highlighted this morning was the fact that the number of high loan to value mortgage applications is well below the proportion seen before the 2008 crisis. This would seem to indicate more conservative lending policies by UK mortgage providers although the UK government’s Help to Buy scheme is starting to have an impact.

Quote from PropertyForum.com : “Improved economic conditions in the UK are encouraging private house builders to increase construction but they are still not building enough homes, according to a new analysis.”

The scheme currently offers a 20% interest free loan on new builds valued below £600,000 with buyers expected to put down a 5% deposit and the balance made up from a mortgage arrangement. However, the programme will be extended in early 2014 to take into account existing properties offering an array of mortgage guarantees to inject more confidence into the marketplace.

UK property prices

Halifax, one of the U.K.’s prime mortgage lenders, announced this week that UK property prices in July increased at the fastest annual rate for three years with further improvement expected in the second half of 2013. On the surface, the ongoing increase in the value of UK homes seems very much at odds with the difficult and challenging economic environment and the fact that many households are seeing their finances severely disrupted on numerous fronts.

While there is no doubt that the government’s Help to Buy scheme is helping to feed the property frenzy, there is also no doubt that a lack of supply compared to demand is pushing prices to levels which are unsustainable in the short term in some parts of the UK. It may well be that the UK economy kicks on in the short to medium term and recent house price rises will look more “sensible” but at this moment in time UK government debt continues to spiral and there are yet more significant austerity measures to push through. Against this backdrop, does this really warrant such a growing momentum in the property sector?

UK base rates

Despite the fact that some experts in the property sector have major concerns about a potential housing price bubble in the short to medium term, Mark Carney has already indicated that UK base rates are unlikely to move higher before the next general election. This means that relatively “cheap” finance will be readily available to UK mortgage providers and UK property investors in the short to medium term which is likely to feed the property frenzy still further.

We must also bear in mind the fact that with the UK economic recovery still fragile and difficult to predict, it would make no sense to increase UK base rates and effectively kill off the green shoots of recovery. So, while the Bank of England is not overly concerned about UK house price rises over the last few months this is an area of the UK economy which will be very closely watched by many people. Quite what the government would be able to do in the event of overheating in the housing sector remains to be seen because, as we mentioned above, any increase in UK base rates in the short term would almost certainly tip the UK back into recession.

This is turning into a very difficult situation!