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Housing market anxiety deepens Matthew Warburton - 13/06/2014

house_of_cards_300I blogged two weeks ago on growing concerns that the house price bubble in London and the South East is a significant threat to economic recovery and long term financial stability. Concern now appears to be spilling over into anxiety. Among those whose concern I reported was Mark Carney, Governor of the Bank of England.


Yesterday, in his speech at the Mansion House dinner, Carney warned that it may be necessary to raise interest rates this year (rather than next spring, as previously expected), primarily to deal with overheating in the housing market. Chancellor George Osborne used the same occasion to announce new powers for the Bank to cap the size of mortgage loans compared with income or the value of the house. Earlier the same day, Business Secretary Vince Cable called for mortgage to income ratios not to exceed 3.5 to 1.


Perhaps in an attempt to forestall drastic action, RICS published new predictions pointing to a lower rate of house price increases than had previously been forecast. London price rise expectations have been cut from 9% a year (predicted in March) to just under 5% now. The RICS suggested that sellers and buyers have been listening to the news, and are becoming more cautious about future risks, including the effect of higher mortgage rates.


Carney has called for reform or scaling back of the Help to Buy scheme, joining a wide range of other commentators. Defenders of the scheme point to its impact in boosting housing supply. If it were to be scaled back, there could indeed be an impact on the volume of homes built for sale by private developers.


There is a strong argument for coupling any such action with new measures to boost building by councils and housing associations, including by lifting the debt caps that currently restrict HRA borrowing. As George Osborne and Mark Carney both said last night, we need to build more homes. But it is not just homes for sale that are needed.


The best available estimates point to a need for around 240,000 new homes a year, of which a third need to be social or affordable housing. That means doubling the output of councils and housing associations - a much bigger expansion than is needed in the output of homes for sale.

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