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BoE to stress test lenders against 35% house price fall

The Bank of England will test lenders’ ability to withstand a 35 per cent fall in house prices and a rise in interest rates to 4 per cent under stress-testing proposals to be carried out later this year.

In January the European Banking Authority announced a stress test which will assess the resilience of banks across the EU.

Today the Bank of England has announced details of its own stress test which will run alongside the EBA initiative.

It will test eight major banks and building societies against a 35 per cent drop in house prices, interest rates of 4 per cent, a 3.5 per cent decline in GDP and a rise in the unemployment rate to 12 per cent.

Bank of England governor Mark Carney says although the events in the stress test scenario are “extreme”, the test will ensure the UK financial system absorbs rather than amplifies shocks.

He says: “Much has been achieved in recent years to put the UK banking system on a sounder footing, so that it can support the UK recovery.

“The challenge now is to secure a strong, sustainable and balanced economic expansion. The Bank’s annual stress test will help ensure our banks support that expansion by remaining resilient.”

According to Nationwide, house prices dropped 20 per cent during the last financial crisis. The average price peaked at £184,723 in September 2007 and bottomed out at £147,746 in February 2009.

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Whats the point of that? In the biggest economic slump in living memory eg 2007 to date prices didn’t fall by anywhere near that amount. Why don’t they stress test house prices against a third world war or a global meteor strike instead? At 35% its got all the hallmarks of a discovery channel Armageddon show!

  2. Last year an OECD report indicated a feeling that UK house prices were 31% too high. Many of us will remember what happened to the values from 1989 to 1993 where the drop was, in many cases, nearly 40%. Not forgetting what has happened in the past is important going forward. Too often past lessons are forgotten and house prices are too high, if first time buyers can’t buy a property until they are in their mid thirties. that is just my opinion but I am not alone in that view.

  3. The OECD report was based on speculation and conjecture.

    The BOE seem to have joined their collegues at Budgy Smuggler Cove. Oh to make a living off create headlines and problems based on hogs wash and making it up after the event.

    House prices will falter now that the MMR rules are stopping all but those who live alone from moving home.

  4. @Steven Pearman

    “The OECD report was based on speculation and conjecture.”

    I’m sorry Steve but house prices are based on speculation and conjecture, as are most assets. The OECD could be wrong (as you and Chris Gardner could be) but there is no ‘fixed price’ of houses and those who lost money (and their homes) in the early 1990’s know that to their cost.

    As you say the MMR could affect house prices and I get as frustrated as anyone with politicians etc acting after the event but I don’t see that it is outrageous to make sure lenders can pull through a big downturn in values.

  5. @Patrick Schan – I do agree that prices of assets are nothing more than speculation and conjecture, however my position is a simple one; house prices have been through a real life stress test in the last few years or so being ‘stressed’ by the biggest meltdown in living memory. The big difference between now and the early 90’s is about 15% difference in base rate ( I was there with a mortgage!) and even the most hawkish economists believe rates will go no higher than about 5% within the next 10 years. I spend a lot of time gazing at these kinds of numbers and even with my most pessimistic head on the kind of standard deviations data reveals are really quite low and there simply is NO evidence of an impending house price crash either real or theoretical. MMR etc will no impact whatsoever on prices.

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