18 May 2014

Housing is ‘biggest risk’ to UK economy, says Carney

“The biggest risk” to the UK economy comes from the booming housing market, Mark Carney warns, as he suggests the Bank of England may step in to stop a “big debt overhang” building up.

The governor of the Bank of England told Sky: “The biggest risk to financial stability, and therefore to the durability of the expansion – those risks centre in the housing market and that’s why we are focused on that.

He is absolutely right when he says fundamentally we need to build more houses in Britain. David Cameron

“We don’t want to build up another big debt overhang that is going to hurt individuals and is very much going to slow the economy in the medium term.

“We would be concerned if there were a rapid increase in high loan to value mortgages across the banks … we’ve seen that creeping up and it’s something we’re watching closely.”

‘Deep problems’

However, Mr Carney said that the UK housing market has “deep, deep structural problems”, which the Bank can do nothing about.

“The issue around the housing market in the UK… is there are not sufficient houses built in the UK,” he said.

“(There are) half as many people in Canada as in the UK, (but) twice as many houses are built in Canada every year than in UK.”

The chancellor cannot wash his hands of what’s happening in the housing market. Ed Balls

Prime Minister David Cameron agreed with Mr Carney’s assessment – but said that the Bank of England has the tools at its disposal to prevent housing bubbles.

“We have given the Bank of England the duty to make sure that bubbles are dealt with in the economy. They have all the powers they need to do that,” he said.

“He (Mr Carney) is absolutely right when he says fundamentally we need to build more houses in Britain,” Mr Cameron added.

Changing Help to Buy

Mr Carney suggested that the Bank of England could impose a new “affordability test” for borrowers, as well as reining in the government’s controversial Help to Buy scheme.

“We could do more, we could take steps around affordability to test whether or not individuals can test mortgages at much higher interest rates,” he told Sky’s Murnaghan programme.

“We could limit amounts of certain types of mortgages that banks could undertake, we could provide advice – the chancellor has asked us if we would provide advice on changing the terms of Help to Buy – all those things are possibilities and we will consider them all.”

Deputy Prime Minister Nick Clegg told the BBC’s The Andrew Marr Show: “I think if (Mr Carney) says that we need to pare back some of the government schemes, like Help to Buy, then I think we should do so.

“He’s certainly right when he says the big long-term problem is we simply don’t build enough homes in this country, we haven’t done so for years, we’re making progress now but we need to do much more in the future.”

Read more: Will young people find it even harder to buy a home now?

But shadow chancellor Ed Balls said it is the government that needs to do more.

He said: “The governor’s comment that the Bank of England can’t build a single home puts the ball firmly in George Osborne’s court to act on housing supply.

“He should also reform Help to Buy by cutting the £600,000 limit and introduce the Help to Build scheme we have called for.

“The chancellor cannot wash his hands of what’s happening in the housing market. Unless the government acts, the danger is that the Bank of England will be forced to raise interest rates prematurely.”