THE UK needs to take swift action to rein in risky mortgages, with soaring house prices a risk to the economic recovery, the International Monetary Fund (IMF) has warned.
It called for “targeted and timely” measures to clamp down on high loan-to-income ratio home lending, adding pressure on the Bank of England to act when it issues its latest report on financial stability later this month.
The IMF also urged ministers to consider an early end to the flagship Help to Buy scheme offering mortgage guarantees and loans for those struggling to find a deposit.
In response, Chancellor George Osborne said the UK would “remain vigilant” for any risks that might emerge from the housing market, having earlier told BBC Radio 4’s Today programme that the Bank “should not hesitate” to take action if the housing market poses a risk to the economy.
Nationwide chief executive Graham Beale has called for a delay in any such action, with the housing market in London showing signs of a correction and prices outside the capital still well off pre-crisis levels.
The IMF itself painted a rosy picture of the UK’s performance, saying: “The economy has rebounded strongly and growth is becoming more balanced. Growth has accelerated since the second half of 2013, and leading indicators suggest that the recovery has momentum.”
It said the recovery, though initially led by household spending, had seen a pick-up in business investment, though exports remained subdued. But the IMF warned of the risks posed by the housing market as well as historically-low productivity in the economy.
“House price inflation is particularly high in London, and is becoming widespread. So far, there are few of the typical signs of a credit-led bubble. Nonetheless, a steady increase in the size of new mortgages compared with borrowed incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks.”
IMF managing director Christine Lagarde said: “We have recommended that some macro-prudential measures be considered by the UK authorities and that this be done with a view to addressing not so much house prices but financial risk.
“We also believe it should be done in a gradual, flexible way because the authorities need to assess whether those measures work, how they work.
“Clearly it is something that needs to be watched and depending on circumstances, on pricing levels, those macro-prudential measures should be further activated if necessary.”
She added that the news coming out of the UK recently has been “pretty much all good”.
Risks posed by the housing market have already been addressed by the scaling back of the Funding for Lending scheme - which incentivises bank lending - so that it can no longer be used to back mortgages and has been refocused on small business financing.
The IMF said if this credit increased significantly, the Bank of England’s Financial Policy Committee (FPC) and the Treasury “may wish to consider” whether it should be modified “or even remains necessary for the full three years of the policy”.
There is widespread speculation that the FPC will later this month take action to cool the housing market, when it publishes its twice-yearly report, after Bank deputy governor Sir Jon Cunliffe warned it was the brightest of “blinking warning lights” of risk.