IMF warns UK government over housing bubble risk

                          

The International Monetary Fund (IMF) has warned the government that accelerating house prices and low productivity pose the greatest threat to the UK's economic recovery.

It said rising property values could leave households more vulnerable to income and interest rate shocks.

It also called on the Bank of England to enact policy measures "early and gradually" to avoid a housing bubble.

In April, the IMF said the UK economy would grow by 2.9% in 2014.

The Fund's annual health check of the UK economy found it has "rebounded strongly and growth is becoming more balanced" adding economic growth would "remain strong this year."

It is a significant turnaround from last year when the IMF's chief economist Oliver Blanchard appeared to have a public falling out with the chancellor after he criticised the government's austerity policies.

This year IMF managing director Christine Lagarde admitted the Fund "got it wrong" in its assessment adding that while the UK's economic recovery began with consumer spending, it was now rebalancing towards an "investment-led recovery".

The chancellor said the IMF was "right to warn the government that risks still remain" to the UK's economic recovery.

Ms Lagarde called on financial regulators to consider imposing limits on the number of low-deposit mortgages a bank or building society can advance to borrowers, highlighting fears that some people may be at risk of overstretching their finances.

The IMF report said: "House price inflation is particularly high in London, and is becoming more widespread. So far, there are few of the typical signs of a credit-led bubble.

"Nonetheless, a steady increase in the size of new mortgages compared with borrower incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks."

It added: "Macroprudential policies should be the first line of defence against financial risks from the housing market."

It said that raising mortgage lenders' capital requirements "would build additional buffers against increased exposures to the housing sector".