The Bank of England indicated unease about the U.K. housing market after Nationwide Building Society said prices were growing at their fastest pace since 2014.
Jon Cunliffe and Dave Ramsden, who both serve as deputy governors for the central bank, said policy makers were watching the house prices carefully as they weigh whether to pare back stimulus for the economy.
Prices climbed 10.9% from a year ago last month, the first dose of double-digit growth in seven years, the mortgage lender said. The monthly gain was twice the pace economists had expected, adding to concerns that the Treasury is adding fuel to the boom with a temporary break on taxes for property purchases.
“What we’re seeing in the housing market at the moment is being driven mainly by the tax holiday,” Cunliffe said on BBC News on Tuesday. “We’ve seen very fast rises in house prices and transactions before tax holidays in the past. There are some signs that people are making different housing choices that may affect the future.”
Earlier, Ramsden told the Guardian newspaper that “there’s a risk that demand gets ahead of supply and that will lead to a more generalized pick-up in inflationary pressure,” adding, “that’s something we are absolutely going to guard against.”
While the BOE’s main gauge of inflation has remained below the 2% target for 1 1/2 years, policy makers expect it to peak around 2.5% by the end of this year, fueled by pent-up savings accumulated while the pandemic closed vast portions of the economy. Retail sales have surged above pre-pandemic levels in recent weeks as Prime Minister Boris Johnson relaxed restrictions to control Covid-19.
House prices have surged since the end of the nation’s first lockdown a year ago, defying a wider economic slump. It’s being driven both by tax incentives and a desire among buyers for extra space. While those figures don’t feed through to Britain’s main inflation indicators, the Bank of England is watching the market as it weighs when to pare back economic stimulus.
“It is shifting housing preferences which is continuing to drive activity,with people reassessing their needs in the wake of the pandemic,” said Robert Gardner, chief economist for Nationwide. “Given that only around 5% of the housing stock typically changes hands in a given year, it only requires a relatively small proportion of people to follow through on this to have a material impact.”
The Office of National Statistics said earlier this month that prices climbed at the fastest pace since the financial crisis in March, although some are predicting the market may run out of steam when a tax cut starts to expire next month.
“Further ahead, the outlook for the market is far more uncertain,” said Gardner, the Nationwide economist. “If unemployment rises sharply towards the end of the year as most analysts expect, there is scope for activity to slow, perhaps sharply, though even this could potentially be offset by ongoing shifts in housing preferences.”