BOE Stays Calm on Debt Amid U.K.’s Tax-Cut Fueled Housing Boom


The Bank of England signaled it’s not overly worried that the U.K.’s current housing boom, fueled by a temporary tax cut, will lead to an unsustainable buildup in mortgage debt.

In its twice-yearly assessment of financial stability, the central bank said while the share of households struggling with debt increased “slightly” during the the pandemic, it “remains significantly below its pre-global financial crisis level.”

The sanguine assessment comes amid a surge in U.K. house prices as buyers race to take advantage of a cut in stamp duty, a levy on transactions. Figures from Nationwide Building Society showed that values rose at a year-on-year pace of more than 13% in June. The boom is likely to cool later this year when the tax cut runs out.

BOE Stays Calm on Debt Amid U.K.’s Tax-Cut Fueled Housing Boom

“So far, there has only been a small increase in mortgage borrowing relative to income in aggregate, and debt-servicing ratios remain low,” the BOE said in its Financial Stability Report.

It added that the Financial Policy Committee’s measures, which target riskier loans, “aim to limit any rapid build-up in aggregate indebtedness.”

The share of new mortgages issued at loan to income ratios of 4.5 or higher increased to 10.4% at the start of 2021, up from 9.5% a year earlier but below the FPC’s 15% limit, officials said. To grab a share of the booming market, banks are offering more high loan-to-value mortgages, where the downpayment is 10% or less. The number of such products has more than tripled since the start of the year.

BOE Stays Calm on Debt Amid U.K.’s Tax-Cut Fueled Housing Boom

House prices have taken off globally during the pandemic, creating a test for central banks’ ability to rein in their crisis support. Withdrawing stimulus too slowly risks inflating real estate further ahead and worsening financial stability concerns in the longer term. Pulling back too hard means unsettling markets and sending property prices lower, threatening the economic recovery from the Covid-19 pandemic.

Some Bank of England policy makers have indicated unease about the U.K. housing market in recent months. Jon Cunliffe and Dave Ramsden, who both serve as deputy governors for the central bank, said officials were watching the house prices carefully as they weigh whether to pare back stimulus for the economy.

The BOE said the boom partially reflects structural factors, such as households wanting more space to accommodate flexible working, the buildup of savings during the pandemic and continued low interest rates. The buoyancy of recent surveys suggests that solid demand may persist beyond the end of the stamp-duty holiday in September, it said.

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