LONDON The International Monetary Fund urged Britain to rein in risky mortgages to cool the housing market, the strongest warning yet from an international organization about the risk of a property price bubble.
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).
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)