Speaking to the Worshipful Company of International Bankers, he notes that UK house prices grew by 10% in the year to March and have returned to the levels they reached in late 2006. Growth has not been limited to London – house prices rose by more than 5% in 10 out of 12 UK regions across that year.
The unusually low level of housing market transactions seen in the aftermath of the crisis means that transactions were, cumulatively, over 3 million lower, between 2008 and 2012, than their long term average. Given that many house purchases are strongly linked to life cycle changes, many of these lost transactions may have only been delayed until credit conditions and confidence about the future improved. It is not at all implausible that this pent up demand could significantly add to pressure on the market for the next few years.
Historically, supply has not kept pace with demand for housing in the UK, with the effect that when demand grows strongly, house prices can keep rising quickly for a long time. "This is a movie that has been seen more than once in the UK," Jon notes.
"It would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year. The extent to which that will jeopardise financial stability depends on whether that pressure actually results in more transactions at higher prices, whether that in turn leads to an increase in household indebtedness and where that debt is concentrated."
He points out that it is particularly important to ensure now that current low levels of borrowing costs do not mask the likely cost of mortgages and create more headroom for prices to rise. In this regard, the reforms following the FSA's Mortgage Market Review, which came into force last week, should help to ensure that affordability constraints do act against pressures on house prices. But they have not yet been tested.
One possibility is that the housing market could be in for a soft landing, with house price growth slowing as affordability constraints bite. A second is a major overshoot in prices and build-up in debt followed by a sharp correction with negative equity and an overhang of debt for many households. Jon observes that there have been more precedents in the UK for periods of a rapidly growing housing market to end in this way.
Jon notes that the Bank and Treasury have already taken some action in response to the growing momentum in the housing market by withdrawing the cheap funding and favourable capital treatment of mortgage lending from the Funding for Lending Scheme.
The FPC's response will depend on the nature of the risks to stability: its powers of direction on bank capital will bear most directly on lenders ability to weather a downturn and a housing bust once it has emerged; while its powers to make recommendations to the FCA and PRA could bear more directly on underwriting standards and affordability constraints like debt to income, loan to income and loan to value.
Jon concludes that "the growing momentum in the housing market is now, in my view, the brightest light on that dashboard. It has not yet been accompanied by a substantial increase in aggregate mortgage debt, though gross mortgage lending is growing and there are signs that debts are becoming more concentrated. This could fade as affordability and lender constraints act increasingly as a brake on momentum. But other outcomes are very possible and the Financial Policy Committee will need be both vigilant and ready to act."