City watchdog warns on bank’s exposure to housing

Britain’s financial regulator warned this morning that lenders in the UK may be in danger of over exposing themselves with mainstream house mortgages reaching five times income.

The Financial Services Agency (FSA) warned that lenders need to be sure that they can cope with the consequences of a potential housing slump. The FSA’s worry is that a slump or crash in the housing market will leave lenders highly exposed to markets and bad debts. The UK has one of the highest consumer personal debt rates in the world.

The FSA has warned that lenders would need to apply ‘stress tests’ to their loan book using models to assure that they can cope with a fall of up to 40 percent in house prices.

As consumers apply higher levels of ‘gearing’ to purchase houses and at the same time rely more on credit card debt to finance personal spending, there are worries that financial institutions will end up taking the brunt of any consequences of rate hikes and potential property slumps.

At the same time the Governor of the Bank of England, Mervyn King, warned that the outlook was on a knife-edge, saying, “ All lenders and all borrowers should think carefully before they either lend or borrow.”

The Royal Institute of Chartered Surveyors (RICS) revealed in a report today that house prices had risen for the fastest time for seven years and called for measures to dampen the growth.

Whilst the Bank of England is focussed on a narrow measurement of growth (CPI) it seems that the real cost of living (RPI) is adrift and in danger of getting out of control. Certainly the pronouncements this morning from RICS, BoE and FSA indicate that anxiety levels are increasing in all sectors of the market.

It seems that the lessons of the Japanese property boom and eventual crash in 1991 are still not being heeded – but then of course, it’s different this time !