The United Kingdom must curb rapidly rising property prices, particularly in London, and raise taxes rather than just slash spending, to increase its resilience to financial shocks, the European Commission warned yesterday (2 June).
The EU’s executive called for the UK government’s flagship mortgage initiative for first time buyers, the Help to Buy 2 Scheme, to be adjusted and for the supply of housing to be increased.
British house prices have risen at their fastest pace in annual terms in nearly seven years, according to data released today (3 June) by lender Nationwide. The average cost of a UK home is £186,512 (about €229,144) higher than ever before, after 13 months of consecutive growth.
House prices rose 11.1% in the last year, compared with May 2013. It’s the biggest jump since June 2007, taking prices beyond their pre-crisis high and raising concerns of a housing bubble.
The lack of housing is forcing buyers to take on higher mortgages, take on extra debt and pose a risk to financial stability as a result, the Commission said in its annual economic policy recommendations to member states (more here).
It said, “Although the supply of new properties has risen, it remains low and has fallen short of demand by a considerable demand. This has combined with low interest rates and easier terms for mortgage lending (such as higher loan to income multiples) to push up house prices in certain parts of the United Kingdom, particularly in London.”
“The authorities should continue to monitor house prices and mortgage indebtedness and stand ready to deploy appropriate measures, including adjusting the Help to Buy 2 scheme.”
Under the scheme, the government loans up to 20% of the purchase price to first time buyers and movers to new build homes in England, up to a purchase price of £600,000 (€737,154). More than 27,000 people have taken advantage of the scheme.
It has stimulated the mortgage market by helping buyers with a small deposit onto the housing ladder but has fuelled house price rises, especially in London and the southeast of England.
The Financial Policy Committee (FPC) is part of the Bank of England and is charged with identifying, monitoring and taking action against systemic risk; risk to the financial system as a whole. It can issue recommendations on adjusting the Help to Buy 2 scheme, as well as comment on appropriate levels of “stress-testing” for mortgage applicants.
The FPC refused to comment on the Commission’s recommendations but will publish a Financial Stability Report later this month. Any forthcoming opinion on adjusting Help to Buy 2 will be published on 26 June.
Bank of England Governor Mark Carney said last month that the housing market posed the biggest risk to the British economic recovery, due in large part to a lack of new home-building. The central bank is expected to take more measures, possibly this month, to control mortgage lending.
The Commission said more transparency in the use and impact of macro-prudential regulation for housing by the FPC was needed. Macro-prudential regulation is an approach to minimise systemic risk.
Taxes should also be raised on higher value properties and property values updated more regularly. The property value roll has not been updated since 1991, making the current bands and rates in the UK’s council tax system inaccurate, the executive said.
The Commission said the Conservative – Liberal Democrat coalition government should raise taxes across the board, as part of an effort to cut its public debt, instead of relying on slashing spending.
It said policy had been “heavily skewed towards expenditure cuts, therefore the potential revenue contribution form a broadening of the tax base could be considered.”
Public debt targets missed
The UK will miss its Commission targets for public debt. Under EU law, governments must not run budget deficits higher than 3% of economic output or gross domestic product (GDP).
Under the EU treaty, the UK’s only legal requirement is to “endeavour to avoid an excessive government deficit”—in contrast to other member states, which are subject to strict monitoring and possibly fines if they miss their targets and fall under the excessive deficit procedure.
The general government deficit for the UK is estimated at 5% of GDP for 2014-2015, falling from a 2009-10 peak of 11.4%. The UK is predicted to fall under the threshold at 2.4% of GDP in 2016-2017, two years after the deadline set by the European Council.
A Treasury spokesman said: “The European commission continues to support the UK government’s strategy, including its commitment to deficit reduction. The commission’s recommendations are in line with the government’s approach.”
France has also missed its targets (here). 11 countries are still in the excessive deficit procedure, compared to 24 in 2011. The Commission yesterday ended the procedure against Austria, Belgium, Denmark, the Netherlands, Slovakia and the Czech Republic.
The recommendations will be discussed by EU leaders and ministers later this month. They were made for 26 countries, excluding Greece and Cyprus, which are in bailout programmes.
Once adopted by the EU’s Council of Finance Ministers (ECOFIN) on 8 July, member states must implement them into their policy and budgets.
The European Commission has set up a yearly cycle of economic policy coordination called the European Semester.
Each year it undertakes a detailed analysis of EU member states' programmes of economic and structural reforms and provides them with recommendations for the next 12-18 months.
The European semester starts when the Commission adopts its Annual Growth Survey, usually towards the end of the year, which sets out EU priorities for the coming year to boost growth and job creation.
- 26 June: UK Financial Policy Committee published Financial Stability Report
- 26-27 June: EU leaders to discuss country-specific recommendations at European Council meeting in Brussels
- Press release: Country-specific recommendations 2014 (2 June 2014)
- Memo: Q&A: Country-specific recommendations 2014 (2 June 2014)
- Country-specific recommendations 2014
- The European Semester
UK Financial Policy Committee
Bank of England
- Speech by Sir Jon Cunliffe, Deputy Governor: Momentum in the housing market: affordability, indebtedness and risks