Bank of England gets sweeping powers to prevent next house price bubble

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Bank of England gets sweeping powers to prevent next house price bubble

Financial policy committee details new powers as RICS predicts house sales will jump in 2013 as prices stabilise

The Bank of England is to be given sweeping new powers to prevent house prices spiralling out of control, amid predictions that a year of stable house prices in 2013 will spark a resurgence in homebuying.

The Royal Institution of Chartered Surveyors (Rics) predicts the number of house sales will jump amid a resurgence in confidence that prices will stabilise and believes they may even start to move up towards the end of the year. The organisation made its predictions as the Bank of England provided details about how it would use new powers to burst burgeoning economic bubbles by forcing banks to hold more capital.

The Bank's new financial policy committee (FPC), charged with stopping systemic risks from overwhelming the financial system, is getting specific powers which that it could use to force banks to hold more capital against mortgages with high loan-to-value ratios, or a high loan-to-income ratio, if policymakers fear there is a risk to financial stability.

This, consequently, could subdue mortgage lending and limit house price rises. In addition to this so-called sectoral capital requirement, the FPC will be able to force banks to build up capital during boom years, through what are known as countercyclical buffers.

The Bank of England published for the first time on Monday 17 broad measures that would be used to decide whether to order banks to amass capital. The Bank tried to demonstrate that the new measures – described in the past as a return to a 1970s quasi-nationalisation of the banking industry – would not impede economic growth in the future.

"If these tools are successful in reducing the likelihood and severity of financial crises, their use is likely to boost the expected level of UK GDP," the Bank of England said.

Amid fears that the UK is heading towards a triple-dip recession, there appears to be little expectation that the FPC would be attempting to use its new powers during its quarterly meeting in June, when it will first be granted the ability to intervene directly

Fourth-quarter GDP figures scheduled for publication next week may show the economy contracted but the Organisation for Economic Co-operation and Development (OECD) said on Tuesday that the latest data on the UK economy suggested "a moderate firming in growth over the coming months". The government's independent economic forecaster, the Office for Budget Responsibility (OBR), is predicting growth of 1.2% in the UK economy this year compared with a decline of 0.1% in 2012.
Marking an improving trend over recent months, the OECD said its leading indicator rose to 100.7 in November from 100.5 in October. The indicator hit a low of 99.2 in early 2012 after reaching a high of 101.5 soon after the coalition government took office.

However, the OECD warned that the improving situation should be set against a forecast that the economy shrank in the fourth quarter of 2012 and the strong possibility that the UK will suffer a full-blown triple-dip recession.

While the housing market is moribund, Rics said that more homebuyers would emerge in 2013 than last year due to the stabilising UK economy and a lack of sovereign bankruptcies in the eurozone.

Last month, 24% more surveyors across the country predicted transactions to rise rather than fall over the next quarter, said Rics.

The number of homes coming up for sale remained relatively stable last month, while demand from would-be buyers saw a continued increase, according to the Rics survey. A north-south divide will persist in 2013 as London once again bucked the overall trend and saw significant price rises last month.

The north-east and Wales saw the biggest drops. Notably, prices levelled out in the West Midlands last month. This represents the first time in more than two and a half years that prices have stopped falling.

Peter Bolton King, Rics' global residential director, said: "As we start the new year, confidence in the housing market does appear to be improving … it may be that we are now over the very worst."

Meanwhile, the Centre for Economics and Business Research (CEBR) said the lacklustre growth expected in the next couple of years would drive up the UK's debts and force rating agencies to strip the country of its coveted AAA credit status.

Among its forecasts for 2018 are that the debt-to-GDP ratio will rise to 85% compared with the government target of 79% and the deficit in that year will be £68bn – more than double the £31bn forecast by the OBR.

Scott Corfe, one of the CEBR's economists, said: "Weak economic growth will hold back the deficit-reduction programme over the coming years. In addition, there seems to have been a setback in reducing public spending – despite alleged austerity, we expect government consumption to have grown by 2.8% in real terms in 2012 – the fastest pace of growth since 2004. The combination of these two things means that the deficit-reduction programme will stretch into not just the next parliament but into the one after that."

Douglas McWilliams, chief economist at CEBR and a contributor to the report, said: "It will be almost impossible for the UK to maintain its AAA rating in the light of this forecast. The debt/GDP ratio is only forecast to stabilise in 2017-18 and start edging down thereafter."

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