UPDATE 1-House prices rising more than income pose risk - Bank of England's Cunliffe

Thu Jul 3, 2014 5:48am EDT

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(Updates throughout)

By Ana Nicolaci da Costa

LONDON, July 3 (Reuters) - Rapidly rising house prices are a problem that has spread beyond London, and the risk they pose to the economy grows greater the more they outpace mortgage-holders' incomes, a Bank of England policymaker said on Thursday.

London house prices are nearly 26 percent higher than a year earlier - the biggest annual jump since 1987 - and those in the country as a whole were up by almost 12 percent, Nationwide figures showed on Wednesday.

Jon Cunliffe, the BoE's deputy governor for financial stability, told the BBC the central bank cannot control house prices - rising in part due to a shortage of supply - but can try to prevent them from exacerbating household indebtedness.

"As house prices go up ... faster than the amount of money people earn, the only way people can buy is to take on mortgages at higher and higher rates compared to what they earn and then debt in the economy goes up and that leaves the economy quite vulnerable to shocks," he said.

"...What we must try and do is to stop that pressure on house prices leading to higher mortgages relative to what people are earning."

Average British wages are currently growing by less than 2 percent a year. The Bank of England expects this growth rate to rise to just 2.5 percent for 2014 as a whole.

The BoE said last week that no more than 15 percent of new mortgages could be to people seeking to borrow over 4.5 times their annual income.

But the impact of the new measures is expected to be minimal in the near term. Only around 10 percent of loans fall into this category nationally, rising to roughly 20 percent in London.

Adding to pressure on borrowing costs, recent strong economic data has reinforced bets the BoE could raise interest rates this year.

Cunliffe said he could not give a timing on when monetary policy will be tightened, reiterating the BoE's stance that when the time comes, the pace will be "gentler" and that rates would not rise as high as in the past.

BoE Governor Mark Carney said last week that market expectations that rates will be around 2.5 percent in three years was "not inconsistent" with the economy returning to form.

"When Mark Carney was talking about 2.5 to 3 percent, I think he was talking about the level to which the markets were now predicting interest rates would go to," Cunliffe said.

"We've said that the things we are looking at now are (measures of) the amount of spare capacity - the room for growth that is in the economy to allow the economy to grow without giving rise to inflation pressures." (Editing by John Stonestreet)

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