An employee adjusts a leaflet for a property in the window of an estate agent in Guildford, southern England. The OECD estimates house prices are 30 percent too high in the UK. Photo: Bloomberg

London - Concerns are mounting that the UK’s housing market is over-inflated, with London house prices rising almost 19 percent in the year to April.

Bank of England governor Mark Carney has described the situation as the greatest risk to the economy. The International Monetary Fund is worried. Ditto EU officials.

The pressure is on to act now rather than risk having it all come crashing down later, dragging Britain back into recession. A Bank of England committee set up in the wake of the economic crisis to ensure financial stability was widely expected to take action yesterday to cool the market.

The move will be of interest globally, as its outcome will shed some light on how much a central bank can keep a specific sector from overheating without putting the brakes on the economy as a whole.

“This may not be the mother of all house price bubbles, but it may be the sister,” said David Blanchflower, a former member of the Bank of England’s monetary policy committee.

“Does it make any sense for the economy? The answer has to be no.”

Driven by interest from wealthy investors, an improving economy and pent-up demand in a country with a chronic housing shortage, house prices rose 18.7 percent in the capital and about 10 percent in the rest of the country in the year to April, according to official statistics.

That far outstripped the 0.7 percent increase in wages, including bonuses, during the same period.

That means Britons have to borrow more to buy a home. Homeowners in Britain often get new home loans every two or three years to take advantage of fluctuating markets – rather than a fixed longer-term system common in the US.

Carney recently described over-extended borrowers as a threat to the financial system, as households make up the bulk of domestic borrowing.

“History shows that the British people do everything they can to pay their mortgages,” Carney said this month. “That means cutting back deeply on other expenditures when the unexpected happens, potentially slowing the economy sharply.”

Figures from the Organisation for Economic Co-operation and Development (OECD) suggest property prices in Britain are about 30 percent too high when compared with wages. In the US, by contrast, most homes are valued correctly while Japan remains the cheapest market among OECD members after years of deflation.

The froth can be seen in the explosion of real estate agents, particularly in desirable neighbourhoods.

PricedOut, a group that campaigns for affordable house prices, says people with steady but modest jobs, such as nurses, teachers and engineers, have little hope of buying a home, especially in the south.

Take the experience of Daniel Philpott, 35, of London, who has been sleeping on the sofas of friends and family for two years in hopes of saving enough for a down payment. He makes £40 000 (R720 000) a year designing commercial air-conditioning units. If he had to pay rent, there would be no hope of saving enough to buy stability.“

These high prices are just completely untenable,” he said.

If things reach a breaking point, experts fear a brutal correction like the one that hit the US during the financial crisis.

Carney has made it clear he wants to intervene before there is trouble, but says rate hikes are still months away. That leaves the Bank of England’s financial policy committee to try new measures.

– Sapa-AP