U.K.’s House Price Boom Driven by ‘Race for Space’, BOE Says

U.K.’s House Price Boom Driven by ‘Race for Space’, BOE Says

Britain’s house price boom has been driven by the “race for space” as people left city flats during the pandemic, the Bank of England says.

U.K. house prices rose 11.8% in the year to September, one of the fastest rates of growth in the past 20 years. About half of that rise can be explained by people wanting to move to larger homes, the central bank said.

That contrasts with economists such as Ian Mulheirn of the Tony Blair Institute for Global Change, who have argued that the cut in interest rates from 0.75% to 0.1% in March 2020 and the stamp duty holiday on the first 500,000 pounds ($661,000) of a home purchase drove the pandemic property boom. The BOE’s analysis did not mention rate cuts.

Instead, it said “just under half of the increase” was down to the race for space and the other half was down to “other factors, including the temporary relief to the stamp duty land tax, and savings accumulated by households during lockdowns.”

The BOE said the shifting housing pattern made it less likely that house prices would fall. “Absent further developments, there is unlikely to be a sharp correction in the level of house prices without a reversal in the ‘race for space’ housing preferences,” it said.

The analysis was accompanied by proposed changes to its mortgage affordability rules that would allow as many as 85,000 homebuyers to take out more debt.

The BOE said in its December Financial Stability Report it plans to to relax affordability tests for borrowers despite the housing boom, scrapping a rule introduced in 2014 to keep a lid on rising household debt.

Read more about the BOE’s December financial stability report

Subject to a consultation next year, its affordability checks to make sure borrowers can pay their debt even at far higher interest rates will end, leaving just the separate loan-to-income limit on borrowing.

The central bank produced research showing that the affordability rule had little impact on household debt beyond the loan-to-income limit, which stops lenders providing loans of 4.5 times a borrower’s income on more than 15% of the mortgages they extend.

It said the affordability rule on its own prevented only 1% of renters, equivalent to a total of 50,000 potential first time buyers, getting on the property ladder. The main reason they are unable to buy is because they do not have a large enough deposit, the BOE said.

Another 6% of existing borrowers, equivalent to 35,000 households, would have been able to take on more debt were the BOE’s affordability checks abandoned.

The BOE said that house prices boom had not affected household debt sustainabilty, which remained strong.

©2021 Bloomberg L.P.