Bank of England: if house prices keep rising, there's going to be a crash

When even the Bank of England warns about the dangers of out-of-control house prices, it's time to start looking over your shoulder.

by Emma Haslett
Last Updated: 20 Nov 2015

House prices are now 10.9% higher than they were this time last year, Nationwide said last week – and now a deputy governor of the Bank of England has warned that unless that slows down soon, something’s going to give.

Sir Jon Cunliffe, the deputy governor for financial stability, said last night that a ‘sharp correction, with negative equity and an overhang of debt for many households’ would be the result of letting this continue.

‘Whether and how to act further if, following the pause of the last couple of months, momentum continues to build, will be the most challenging judgement the FPC [the Bank’s Financial Policy Committee] will have to take in the coming months,’ he said.

The 'bubble' speaks of is mainly in London - in the rest of the country, house prices are only just starting to recover. And the trouble is, the FPC’s powers extend to making it harder for people to get mortgages: exactly the opposite of what George Osborne was trying to do by introducing in Help to Buy, which provides government guarantees for 95% mortgages.

Since Osborne started the scheme last year, the housing market has recovered and prices have risen – which has caused the government to furiously backtrack. First, it stopped mortgage lending through the Funding for Lending scheme (which is now reserved for business lending only). Now, it’s considering doing something called the ‘Mortgage Market Review’, which it hopes will keep house prices down, although Cunliffe says it has ‘not yet been tested’.  

It’s simple economics, really: if you make mortgages harder to get, everyone will have to keep renting. Because of that, rental prices will rise. Policy-wise, it’s a non-starter.

The only long-term way to constrain house prices is by, well, building more homes. If supply can meet demand, prices will stay low. Unfortunately, as is often pointed out, we’re building 100,000 too few homes a year. Unless someone does something radical, this is just going to continue.

It’s crushingly ironic that the morning after Cunliffe’s comments, the Times revealed a flat at One Hyde Park has just been sold for £140m. Penthouse D is 16,000 sq ft and has been bought by someone from Eastern Europe, ‘thought to be Russian or Ukrainian’. At present, the flat is an ‘unfitted shell’, but its new owner is expected to spend £20m-odd to fit it out. The Knightsbridge branch of B&Q is in for a very enjoyable bank holiday…

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Has the cult of workplace wellbeing run its course?

Forget mindfulness apps and fresh fruit Fridays. If we really care about employee wellbeing, we...

Cybercriminals: A case study for decentralised organisations?

A study shows that stereotypes of organised criminals are wide of the mark.

Why your turnaround is failing

Be careful where you look for advice.

Crash course: How to find hidden talent

The best person for the role might be closer than you think.

What they don't tell you about flexible working

The realities of ditching the nine to five don't always live up to the hype....

The business case for compassion: Nando's, Cisco and Innocent Drinks

Consciously, systematically humane cultures reap enormous benefits, argues academic Amy Bradley.