Recovery at risk as London house price boom outstrips wage growth, warns Moody’s
Britain’s banking recovery is at risk from a housing crash, analysts warned yesterday – and that could throw the whole economy off track.
The 17 per cent boom in London house prices is far outstripping wage growth, credit ratings agency Moody’s warned, and could come grinding to a halt.
Rising interest rates could hit some borrowers, while others might over-reach themselves trying to buy a house.
If prices tumble as a result, borrowers could be unable to pay their bills, banks could be left with bad debts, and the economic recovery could falter.
“Despite relatively upbeat economic conditions in the UK, the fast-growing housing market, particularly in the southeast poses a significant risk of a price correction absent a corresponding increase in real wages,” said Moody’s Carlos Suarez Duarte. That crash in prices could then hit wider consumer borrowing and spending, hammering the overall economy.
“With growth rates approaching a pre-crisis pace, there is reason to remain vigilant, as a significant correction would constrict housing investment, reduce consumer confidence and tighten lending conditions,” the analysts said.
Their stark warning came as the City watchdog set out rules for banks limiting the risky mortgages they can give house buyers.
From October, only 15 per cent of any bank’s mortgages can go to home buyers who are borrowing more than 4.5 times their income.
The loan to income (LTI) limits were proposed by the Bank of England in June and fleshed out by the Financial Conduct Authority (FCA) yesterday.
The idea is to stop borrowers over-stretching themselves, and to make sure banks are not too vulnerable to a fall in house prices.
Under the new guidelines banks will submit their lending data to the regulator every three months, to make sure their loans are within the limits.
Buy-to-let loans will not count towards the threshold, the FCA said, warning banks to watch out for fraudulent applications by homebuyers trying to use this as a loophole.
Banks with less than £100m of mortgages in any given year will also escape the rules, as they are not considered a risk to the financial system.
Those rules will not bite yet, as most banks are far short of the limit.
Young buyers are likely to be the first to be hit, as they have less saved up and so need to take out bigger loans.
“The greatest impact is likely to be on first-time buyers, who tend to be younger borrowers, and will tend to apply for higher LTI mortgages, and on single income households. ” said the FCA.
But it said this disproportionate impact does not break discrimination rules.
“We are content that any less favourable treatment of younger groups pursues a legitimate aim,” said the consultation document.