Jon Cunliffe: Momentum in the housing market – affordability, indebtedness and risks Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at the Worshipful Company of International Bankers dinner, London, 1 May 2014. *  *  *  In 2007, the average house in the West Midlands cost around £ 1 Transactions in that region were running at 10,000 a month. By 2009, the average price had fallen by around 15% to around £ and transactions to around 5,000 a month. And, while prices and transactions bounced back in 2010, prices were subsequently pretty flat in the West Midlands until spring last year. Over the 12-months to March, prices grew by a little under 10% in the West Midlands. The average house in the region now costs around £ – 7% off the peak. Transactions in the region look to have averaged around 7,000 a month in 2013. I mention the West Midlands because the level and growth rate of house prices in that region broadly matches the median for the country as a whole. The point is the rapid growth in the UK housing market is not just a London story. For the country as a whole, prices at the end of March were also up around 10% on their level a year ago, back to where they were in late 2006. For 10 out of the 12 regions of the UK prices grew by more than 5% in the year to 2014Q1.
So it is particularly important at present to ensure that the current low levels of interest rates do not mask the likely cost of mortgages and so create more headroom for prices to rise. It is possible that affordability constraints, reinforced by lenders’ underwriting standards, will increasingly act as a brake on the speed at which house prices are growing and as a brake on mortgage debt. In that case, having recovered much of their fall following the crisis, we will see house price growth slow to match the pace of earnings growth – a soft landing. This is not without precedent. In 2004, having risen at an average rate of almost 20% over the previous 2 years, house price growth began to slow with the annual growth rate falling to just 2% by the middle of 2005. The 125bps increase in Bank Rate in the 13 months to September 2004 was no doubt part of the story. It proved, however, to be short lived episode. Amid a period of easing credit conditions, the pace of house price growth began to rise again through 2006, reaching double-digit rates by 2007. But it is probably an example of how affordability can brake the market. However, there is another way the story can play out – 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.