UK Housing Bubble Fears – What can Bank of England do?

Opposing forces are at play in the UK property Market. People want to buy houses, but the supply is a bare trickle. What you have now is a market where the prices can easily go above inflation rates, and worrying signs a property bubble.

Not surprisingly, the Bank of England is now on a bubble alert. Policymakers have started taking steps to prevent a possible boom-bust. The current boom in the market is therefore likely to be only temporary, and not sustainable.

The market definitely needs to ramp up supply to meet the demand. Paul Cheshire, professor at London School of Economics, suggests in the latest edition of Centerpiece magazine that the solution to the problem is to ease the green belt rules. Changes in planning laws, and rebalancing the economy to encourage population to move to areas with abundant housing could also solve the problem to an extent. However, these things would take time.

At the moment though, the Bank is bearing down on demand by imposing more intensive mortgage market reviews for potential borrowers. Tougher capital rules, where lenders have to set aside enough capital to withstand the 35% drop in house prices, also limit the money that is available for banks to lend.

The Bank can easily rein in the Property Market any time by increasing the interest rates, which will cause the house sales to dry up and prices to fall. However, that is the last resort. For the time being, capping the upper limit of Help to Buy at £300,000 (from the current £600,000), maybe all that is needed for the Bank to send a clear message to the property market.