Concern has been raised in various quarters that UK property prices are rising in an unsustainable fashion and could be inflating a property bubble. The problem is most severe in London and the South East – where property prices are typically the highest in the land. Across the UK as a whole, property prices saw an 8% annual rise whilst prices in the capital climbed by 17%, according to the Office for National Statistics (ONS).
Whilst guidance has been given to ensure that mortgage lenders must determine that clients can afford mortgages, it is still possible for some people to secure mortgages worth five times their annual salaries. Given that interest rates can only rise, this is a worrying situation. First-time buyers are borrowing an average of 3.42 times salary currently (April) compared to just a factor of two in the early 1980s. Current prices for the “average” home are now six times above average income, so something needs to be done.
Speaking at London’s Mansion House, the Chancellor of the Exchequer, George Osborne, said that the government would give the Bank of England new powers to prevent the housing market from “overheating” in the current parliament. This is to include imposing a cap on mortgage to salary ratio or on the value of the property. He told the gathering: “We saw from the last crisis the dangerous temptations for politicians to leave the punch bowl where it is and keep the party going on for too long. I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market. I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust." He also announced that planning regulations would be relaxed, leading to the construction of an additional 200000 new homes.
Speaking at the same function, Mark Carney, Governor of the Bank of England, dropped heavy hints that UK interest rates could start the process of gradual rising before the end of this year. Most analysts and the Bank’s own forward guidance had suggested that the process would not start before Q1 2015. A rise in interest rates would feed through to mortgage costs, of course.