Will the Bank of England Step into the Property Market?

By Simon Morris On Friday, May 02 nd, 2014 · no Comments · In , ,

Comments from senior figures at the Bank of England this month on the rising rate of UK house prices, have suggested that the Bank may step in to assert control over the situation. What could this mean for investors whose property fund portfolios contain residential elements?

Among property industry professionals, and even the investing public at large, it’s no secret that property prices are held to have finally recovered from the recession. Prior to last year, house price rises were primarily focused in the lucrative central London boroughs.

The particular success of this market, in contrast with property markets in other regions of the country, was because of the influx of cash rich buyers it traditionally attracts.  However 2013 was a pivotal year. House prices last year rose by 6.8%, according to the Office of National Statistics (ONS). London’s actually still increased faster than anywhere else in the country, at 13.2%, however in the outer boroughs inflation has been a significant issue.

Bank Intervention….

Inflation really is affecting house prices in outer London boroughs at the moment. Take Brent, a less fashionable borough in the outskirts of North London. House prices in Brent last year rose by 31%.

This type of “chunk” price increase, according to Nationwide Bank, was recorded in other British regions in 2013. Nationally when you adjust house prices for inflation, they remain 16% below their pre-crisis levels.

This is why the Bank’s new Financial Policy Committee (FPC), has said that it is keeping an eye out for “emerging vulnerability” in the market right now. The Bank is currently considering stricter interest rate tests, which will allow it to more tightly control new loan rates, which are a significant factor in housing market price rises.

Specifically, current rates for new loans for first time buyers stands at an average of 3.4 times a borrower’s income. Banks such as Barclays offer standards at 5.5 times a borrower’s average income. Whilst this is manageable, if prices continue to rise, it may precipitate a property bubble of the size that caused the market to crash in 2008.

This could have a significant effect on property investment fund portfolios. However this effect may be mitigated if the Bank go ahead with such a policy and property market values across the board remain stable for the foreseeable future.

Simon Morris

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