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 The IMF said in its annual report on the country's economy published
on Friday that so far there were few signs of a credit-driven bubble
in British house prices.
But that could change fast and lenders should stop letting so many
home-buyers take out mortgages that are far larger than their
incomes, it warned.
"In an environment where expectations of capital gains can quickly
drive up household indebtedness - and thus systemic risk for
financial institutions - more policy action is warranted," the Fund
said.
Britain's finance ministry and its central bank have said they are
keeping a close eye on the housing market. The European Commission
expressed concern earlier this week, echoing worries from the
Organization for Economic Co-operation and Development.
British house prices have risen by more than 11 percent over the
past year according to one measure, the fastest rate since the eve
of the financial crisis, though most of the increases in and around
London. Last month another index showed its biggest one-month jump
since 2002.
The onus for action falls on the Bank of England. It is due to give
its own half-yearly assessment of financial stability risks later
this month when it could take more measures to control the mortgage
market.
IMF managing director Christine Lagarde presented the report
alongside Britain's finance minister George Osborne, who earlier on
Friday said the BoE should not hesitate to act on housing if needed.
In its report, the IMF said that given the uncertainty about whether
the BoE's largely untested macroprudential tools would work, "they
should be introduced early and gradually".
A first step would be to limit the proportion of high loan-to-income
mortgages any lender could issue, the IMF said. If that failed, the
BoE should impose caps on loan-to-income and loan-to-value ratios,
and increase the amount of capital lenders must hold against
residential property loans.
Two major British banks, Lloyds Banking Group and Royal Bank of
Scotland, have already said they will no longer lend at multiples of
more than four times a borrower's income for mortgages of over
500,000 pounds ($839,500).
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The government and the BoE might also need to stop offering mortgage
guarantees under the Help to Buy programme if it sees much greater
take-up. The scheme was launched by Osborne last year to help poorer
households buy homes.
If these steps do not work, the BoE would need to be ready to raise
interest rates fast, the IMF said.
"Policy might, however, have to be tightened quickly if costs run
ahead of productivity growth, slack is absorbed, or financial
stability concerns cannot otherwise be addressed," the report said.
More broadly the IMF's tone was much more upbeat than a year ago,
when Britain's economy looked far weaker. Then, some officials at
the Fund feared Osborne was too focused on tightening fiscal policy
at the expense of growth.
"The economy has rebounded strongly and growth is becoming more
balanced," the IMF said, adding that it expected this to continue
through the rest of the year.
Weak productivity was a risk to future growth, but overall Britain's
fiscal stance was appropriate, it added.
(Reporting by David Milliken; editing by William Schomberg)
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