Falling property prices in the U.K. are moving up financial firms’ risk management agenda.
The results of the Bank of England’s twice-yearly systemic risk survey, published Monday, show that 40% of those quizzed cited falling property prices as a potential risk to the stability of the financial system. Only a quarter of respondents said the same a year ago. Respondents include hedge funds, banks, building societies, large complex financial institutions, asset managers and insurers.
The findings underscore deepening concern in the U.K. over a rapid in rise in house prices, particularly in London and England’s southeast. Average house prices rose 8% in the year to March, according to the Office for National Statistics, propelled by a 17% annual rise in prices in the capital. That has left a big disconnect between real wages and rapidly rising prices, with loan-to-value and loan-to-household earnings ratios rising to worrying levels.
The acceleration in house prices is ringing alarm bells at the Bank of England, where officials fret that higher prices will prompt homebuyers to take on unaffordable debts, which could leave them and their lenders nursing heavy losses if interest rates rise quickly or prices fall.
Monday’s survey shows those concerns are shared in the financial sector. Seventy-two firms took part, including banks, asset managers and insurers.
The risk of another economic downturn was financial firms’ biggest worry, cited by 61% of respondents. Geopolitical risks also came into sharper focus because of tensions between Russia and the West over Ukraine.
Almost two-fifths of respondents said ultralow interest rates could also pose a threat to the financial system.