The UK housing market remains the biggest domestic risk to economic stability as household debt levels remain high relative to incomes.
The Bank of England’s Financial Stability Report today warned that high household indebtedness in the UK made the eight financial institutions submitted to the Bank’s stress test more vulnerable in the event of a very severe housing market shock or to sudden changes in interest rates.
This is because in the event of either scenario, households with the highest debt levels might react by cutting spending sharply in order to maintain mortgage payments, with potentially severe consequences for the rest of the economy.
Following the June report, when the housing market was identified as a potential problem, the Bank has kept UK interest rates at a record low of 0.5 percent and has capped mortgage lending, while the Mortgage Market Review introduced new affordability checks to ensure that borrowers would be able to weather a future rise in interest rates.
The report said that these measures had moderated UK house price inflation and contained further risks from high household indebtedness as the housing market slowed.
Andrew Solomonides, director of Crystal Life Mortgages in Crouch End, said: “It’s a completely different world in London. Everything’s related to work. As long as there’s work and the income remains at the levels they are, London should be fine.
“In terms of house prices, that’s definitely slowed down in the past six months. This time last year you couldn’t make an offer on a property, you had to offer over the asking price, whereas now you can offer.”
Colin Payne, associate director of Chapelgate Private Finance in Belsize Park said last week that homeowners in prime areas of north London were unlikely to struggle if interest rates increased, because tighter lending regulations have already been in place for some time following the MMR.
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Mr Payne also said: “Typical cost of living costs i.e. utility bills, council tax and food are generally the same for all borrowers so, given borrowers in our locality are higher earners, they have more disposable income to accommodate increases in the interest rate.”
The report also found that buy-to-let lending might be more vulnerable to rising interest rates than owner-occupied mortgage lending, as these mortgages tend to be subject to less stringent checks than owner-occupied mortgages.
Mr Solomonides said: “A lot of the old buy-to-lets in London before the credit crunch weren’t making any profit at all, but since interest rates have gone down they’re making a fair bit, so while a rise in interest rates might reduce their disposable income, it would still be affordable.”
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