Deflating the bubble

Britain’s economic revival has been helped by rising house prices in some
parts of the country, but now the Bank of England is signalling that a
bubble may have to be deflated. Yesterday, Mark Carney, the Bank’s Governor,
felt moved to warn that the housing market has “deep, deep” problems that
could pose the “biggest risk” to the economy. The challenge is a mix of low
supply, too-high demand and the return of overly generous lending –
mortgages greater than four times borrowers’ incomes are running at their
highest level than at any time since 2005. If people borrow more than they
can afford, then the risk of fast accumulating debt and rising interest
rates is obvious.

We have long warned against stoking the property market for the sake of quick
growth or votes, so it is encouraging to see that Mr Carney, too, recognises
the potential dangers. Much still has to be done to shape a truly
sustainable recovery; our deficit remains too high and the average Briton is
still poorer than they were in 2007. The last thing we can afford is fresh
trouble in the housing market. Mr Carney spoke of possibly “limiting the
amounts of certain types of mortgages that banks could undertake”, and
suggested ways to tweak the Help to Buy policy. That such moves may prompt a
rush to borrow before changes are implemented reminds us how delicate the
situation is.

George Osborne has a record of sound management of the economy and will surely
share Mr Carney’s concerns. It is inevitable there will be pressure on the
Conservatives in the run up to the next election to continue to be generous
to home buyers – pressure that is entirely understandable, given the Tories’
traditional, noble commitment to home ownership. Nevertheless, it would be
foolish to imperil the entire recovery by allowing one part of it to
overheat.