* IMF says UK needs to curb high loan-to-income mortgages
* No bubble yet but house prices pose risk to economy
* Osborne says central bank shouldn't hesitate to act
* Labour says report shows cost of UK housing shortage
(Adds Lagarde comments from news conference, opposition and
By David Milliken and Andy Bruce
LONDON, June 6 The International Monetary Fund
urged Britain to cool its housing market by reining in risky
mortgages, the strongest warning yet from an international
organisation about the risk of a property price bubble.
So far there have been few signs of a credit-driven bubble
in British house prices, the IMF said.
But that could change fast and lenders should offer fewer
mortgages that are far larger than borrowers' incomes, it warned
in an annual report on Britain's economy published on Friday.
IMF managing director Christine Lagarde called on the Bank
of England to use its powers over bank lending "early and in a
gradual fashion as the first line of defence against risks ...
from the housing market."
If efforts to rein in the market did not work the Bank of
England would need to be ready to raise interest rates fast, the
"Policy might ... have to be tightened quickly if costs run
ahead of productivity growth, slack is absorbed, or financial
stability concerns cannot otherwise be addressed," it said in
British finance minister George Osborne, who spoke at the
same news conference as Lagarde, said he would stay vigilant
over housing, and that the BoE should not hesitate to act if
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).
With a national election due in less than a year, Osborne
will be keen that the Bank of England does not take steps that
will hurt growth or suggest his measures to revive housing
demand were misguided.
House prices have risen by more than 11 percent over the
past year according to one measure, the fastest rate since just
before the financial crisis, powered by soaring London prices.
BoE Governor Mark Carney said in May that housing was the
biggest threat to Britain's economic recovery. Later this month,
the BoE could add to measures it has already taken to control
the mortgage market.
The IMF said that more needed to be done now. "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."
On Britain's economy more broadly, the IMF's tone was much
more upbeat than a year ago when the country seemed to be on the
verge of falling back into recession. Some officials at the Fund
at the time said Osborne was too focused on cutting the budget
deficit at the expense of growth.
Lagarde, who had a close working relationship with Osborne
when she was France's finance minister, admitted the IMF had got
it wrong. "I am happy to come back yet again and say that we had
clearly underestimated the growth of the UK economy in our
forecast a year ago," she said at the news conference.
Weak productivity was a risk to future growth, but overall
Britain's fiscal stance was appropriate.
FEWER HIGH-LTI MORTGAGES
On housing measures, the IMF said a first step would be to
limit the proportion of high loan-to-income mortgages any lender
could issue. 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.
The government 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 first-time homebuyers.
The IMF said that in the longer term, Britain had to build
more houses. The opposition Labour Party said the report showed
how the government's struggle to get more houses built meant
interest rates might have to rise earlier than otherwise needed.
Andrew Sentance, a former BoE policymaker who has long
called for tighter monetary policy, also said it was unclear how
effective the BoE's so-called macroprudential tools to control
bank lending would be in curbing house price risks.
"To a large extent these measures are untried and untested,"
he said. "If the first (interest rate) rise is delayed too long,
there is a risk that the MPC will have to act quickly after the
election with a succession of rapid rises."
($1 = 0.5956 British pounds)
(Additional reporting by Costas Pitas and Karolin Schaps;
Editing by William Schomberg and Susan Fenton)