## INTRODUCTION AND OVERVIEW

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---

### Overview and purpose
- The purpose of this note is to assess the risks to the financial sector that currently emanate from United Kingdom (U.K.) property markets.
- Property market cycles affect balance sheets of households, banks, and other financial institutions and can propagate via the financial accelerator because many firms rely on real estate as collateral.
- Increasing debt associated with property purchases increases vulnerability of indebted property owners to economic shocks with potential knock-on effects on the rest of the economy.

### Recent developments in property markets
- House price growth:
  - Growth accelerated over the last 10 months: after slowing to below 6 percent per annum during the first half of 2015, the growth rate of house prices increased to 8 percent in early 2016.
  - Decelerated to about 5 percent per annum during the first half of 2015, then steadily accelerated to 8 percent in early 2016; part of the acceleration possibly linked to urgency before April 1, 2016 implementation of the 3 percent stamp duty surcharge on properties that are not primary residences.
- Mortgage lending and market structure:
  - Mortgage lending growth has not returned to pre-crisis levels.
  - Buy-to-let (BTL) lending has grown faster than overall residential property lending.
  - The reduction in the share of new high loan-to-income ratio (LTI) mortgages has recently reversed; the percentage of new lending at high LTIs has started to tick back upwards.
- Commercial real estate (CRE):
  - CRE annual price growth peaked in early 2015 at above 10 percent per annum; prime London CRE grew rapidly in 2014–15.
  - Market slowed in Q1 2016 likely due to Brexit referendum uncertainty.
  - International investors now account for more than one half of CRE financing flows; domestic banks reduced CRE exposures after the recession.
- Supply and demand drivers:
  - Tight supply conditions tightened further after the recession.
  - Restrictive planning regulations, post-recession capacity reduction in construction, and housing completions not keeping pace with new household formation since 2008 are key drivers of current house price growth.
- Interest rates:
  - Low official Bank of England (BoE) rate and global low interest rate environment have contributed to falling mortgage rates across maturities; financial markets expect the Bank rate to remain near the effective lower bound for awhile.
  - Mortgage rates have continued to fall across all maturities; higher LTV mortgage rates have also recently declined.

### Key analytical points
- Excessive lending and price swings in property markets can cause distress to borrowers and lenders; principal macroeconomic channel includes households cutting back on consumption to service debt, potentially contributing to recessionary forces that adversely affect bank balance sheets through channels such as CRE defaults.
- Realignment of relative housing prices reflects restrictive planning regulation, reduced construction capacity, and insufficient housing completions relative to household formation since 2008.
- Tight supply and growing demand are main drivers of current house price growth in an environment with otherwise moderate mortgage lending growth.

### Data and measurement notes
- Official indices for rental prices and CRE price indices are not available.
- Analysts and financial stability monitoring would benefit from official regional data on rental prices in pounds, disaggregated by property type.

---

### DEVELOPMENTS IN PROPERTY MARKETS — Mortgage rates and prices
- Mortgage rates have declined to historic lows; both fixed and variable rates have declined for gross advances and outstanding balances, lowering debt service ratios while mortgage lending growth remained subdued.
- Fixed-rate lending:
  - The share of new mortgages issued at fixed rates now exceeds 80 percent.
  - The share of outstanding balances of fixed rate mortgages climbed to over 50 percent in late 2015.
  - Most fixed-rate mortgages are short-term fixed mortgages with rates fixed for a period between two and five years.
- Securitization:
  - Securitized outstanding mortgage balances decreased from nearly 230 billion pounds in late 2008 to approximately 80 billion pounds in 2015.
  - Share of securitized mortgages peaked at nearly 19 percent of all mortgages in late 2008 and declined to less than 7 percent by 2015.
- High LTV and Help-to-Buy:
  - Share of mortgages with LTV above 95 percent has fallen to well below one percent.
  - Share of mortgages with LTV above 90 percent rose rapidly in 2014 then declined; much of the additional lending at LTV>90 percent in 2014 was almost entirely due to the Help-to-Buy: Mortgage Guarantee Scheme.
  - The Help-to-Buy: mortgage guarantee scheme is due to end at the close of 2016.
- Mortgage arrears and impaired credit:
  - Fraction of new mortgage loans extended to individuals with impaired credit history is presently around 0.2 percent of new mortgage loans (a nearly twenty-fold reduction relative to pre-recession levels).
  - Balance of mortgages extended to individuals with impaired credit histories is less than one percent of current mortgage stock.
  - Mortgage arrears have declined, with the stock of arrears recently below one percent of all loans.

### DEVELOPMENTS IN PROPERTY MARKETS — Demand and supply
- Housing transactions and mortgage lending growth remain well below pre-crisis levels despite house prices rising past pre-crisis levels.
- Supply constraints: restrictive planning regulations; diminished role of local authorities in housing provision; consolidation and exits among builders; worsened financing conditions for remaining builders; overall capacity reductions in construction since the great recession.
- Housing completions have not kept pace with new household formation since 2008.

### DEVELOPMENTS IN PROPERTY MARKETS — Rental and commercial properties
- BTL sector:
  - BTL lending grew from 4 percent of mortgage stock in 2002 to 16 percent of the stock in mid-2015.
  - BTL sector mostly small-scale investors with a few properties.
  - FPC requested powers of direction over the BTL sector to limit LTV ratios and interest coverage ratios; consultation closed in March 2016 with government decision expected in 2016.
  - PRA published a March 2016 consultation on underwriting standards for BTL mortgage contracts proposing affordability tests and interest rate stress tests for BTL borrowers.
- CRE:
  - Annual CRE price growth around 10 percent as of mid-2015.
  - BoE analysis shows CRE overvaluation limited to certain prime locations; on average CRE properties do not appear overvalued, but continued rapid price growth could reduce rental yields and increase the probability of price reversals.
  - CRE price reversals could tighten corporate credit constraints for firms relying on CRE as collateral.

---

### RECENT POLICY DEVELOPMENTS
- Mortgage Market Review (MMR) by the FCA (April 2014): made lenders fully responsible for repayment assessments of all borrowers; FPC recommended affordability assessments stress-tested against a 3 percentage point increase in Bank rate.
- FPC recommendation: limit output of new high LTI mortgages (LTI ratio exceeds 4.5) to 15 percent of lending for each lender.
- April 2015: FPC given powers to direct the PRA and the FCA to limit LTV and DTI ratios in the owner-occupied segment.
- Taxation affecting BTL:
  - HMT reduced the highest rate at which BTL investors can deduct mortgage interest from their income; measure comes into force in April 2017.
  - HMT introduced higher rates of stamp duty land tax (SDLT) for purchases of additional residential properties; higher rates coming into force on April 1, 2016 are 3 percentage points above existing residential SDLT rates for relevant purchases.

### Key policy recommendations (summary)
- Macroprudential tightening conditional on market developments:
  - Macroprudential policies will need to tighten later this year if the recent re-acceleration of housing and mortgage markets persists.
  - Tightening could take the form of tighter LTI and/or LTV limits on new mortgages.
- Regulatory parity across residential markets:
  - Removing asymmetry between buy-to-own and BTL markets in terms of FPC’s regulatory powers should be an important priority.
  - FPC powers of direction over BTL should be essentially equal to those over the buy-to-own market.
- Close monitoring of CRE:
  - CRE warrants close monitoring given rapid price growth (annual price growth exceeding 10 percent as of mid-2015) and the systemic importance of CRE as collateral for firms.
- Address supply constraints:
  - Continued efforts to address supply constraints should continue; increasing housing supply will support near-term growth, reduce the need for excessive household leverage, promote social cohesion by lessening wealth inequality, and lower volatility of prices during upswing periods.
- Data provision:
  - Authorities should disseminate official regional data on rental prices in pounds, disaggregated by property type, and CRE price indices to help estimate degree of overvaluation and support financial stability analysis.

---

### BOX 1. HOUSE PRICE INDICES

### Overview and key issues
- Multiple private and official house price indices (HPI) compiled in the U.K. differ in coverage, timeliness, data sources, and methodology, producing differing estimates of house price levels and growth rates and complicating short-term analyses of price growth and reversals.
- Official HPIs could usefully be expanded to cover CRE and BTL markets and to provide average rental prices in pounds; currently there are no official indices of CRE and BTL prices.
- The ONS has published an experimental index of private housing rental prices (IPHRP) constructed using administrative data collected by the Valuation Office Agency (VOA) and by Scottish and Welsh Governments, but pound values of private housing rental prices are not disseminated.

### Timeliness, coverage, and methodology
- Timeliness:
  - Halifax and Nationwide HPIs: typically released 1 week after the reference period.
  - Office for National Statistics (ONS) HPI: published 6 weeks after the reference period.
  - Her Majesty’s Land Registry (HMLR) HPI: published 4 weeks after the reference period.
- Coverage and data sources:
  - Nationwide: Timeliness 1 week; Data source: Mortgage approvals by Nationwide; Quality adjustment: Hedonic regression. 1/ No cash transactions included.
  - Halifax: Timeliness 1 week; Data source: Mortgage approvals by Halifax; Quality adjustment: Hedonic regression. 1/ No cash transactions included.
  - ONS: Timeliness 2/ 6 weeks; Data source: Council of Mortgage Lenders (CML); Quality adjustment: Hedonic regression. 2/ Larger sample of mortgage approvals than Nationwide or Halifax.
  - HMLR: Timeliness 3/ 4 weeks; Data source: HMLR; Quality adjustment: Repeated sales. 3/ Common backward revisions. Includes cash transactions. Excludes new builds, Scotland and Northern Ireland.
- Official developments:
  - The ONS is developing a new comprehensive HPI that will replace both the current ONS index and the HMLR index; the new index will include both mortgage and cash transactions.
  - The ONS will produce and disseminate a time series of past values of the new index to facilitate transition.

### Mortgage lending and market structure findings (selected)
- Mortgage rates: “Mortgage rates have declined to historic lows.”
- Fixed-rate lending: share of new mortgages at fixed rates now exceeds 80 percent; share of outstanding balances of fixed rate mortgages climbed to over 50 percent in late 2015.
- Securitization: securitized balances fell from nearly 230 billion pounds in late 2008 to approximately 80 billion pounds in 2015; securitized share fell from nearly 19 percent in late 2008 to less than 7 percent by 2015.
- High LTV lending: share of mortgages with LTV above 95 percent well below one percent; LTV>90 percent spike in 2014 largely due to Help-to-Buy.
- Impaired credit and arrears: new mortgage loans to those with impaired credit history around 0.2 percent; mortgage arrears recently below one percent of all loans.

### Household balance sheet vulnerabilities and micro-data insights
- Leverage and vulnerability:
  - Percentage of new mortgages at high LTI ratios above 4.5 remains well above pre-boom levels (circa 2000).
  - Aggregate household DTI ratio has temporarily stopped declining and is higher than in most other G7 countries.
  - High leverage increases exposure to interest-rate, income, and house-price shocks and can amplify an economic slowdown through reduced consumption.
- Micro-data: The NMG housing survey (annual since 2004) provides micro-level LTI and DSR distributions and demographic data used for distributional analysis.

### LTI distribution statistics (selected)
- Total (2014–15): mean 2.03; se(mean) 0.04; p50 1.83; p5 0.20; p95 4.58.
- 2014: mean 2.07; se(mean) 0.03; p50 1.77; p5 0.17; p95 5.00.
- 2015: mean 2.03; se(mean) 0.04; p50 1.83; p5 0.20; p95 4.58.
- Regional highlights (2015):
  - Greater London: mean 2.20; se(mean) 0.12; p50 1.86; p5 0.17; p95 5.52.
  - South East: mean 2.41; se(mean) 0.11; p50 2.30; p5 0.16; p95 5.00.
  - Total: mean 2.03; se(mean) 0.04; p50 1.83; p5 0.20; p95 4.58.
- Age-group highlights (2015):
  - 25-34: mean 2.61; se(mean) 0.07; p50 2.50; p5 0.64; p95 4.73.
  - 18-24: mean 1.99; se(mean) 0.15; p50 1.69; p5 0.11; p95 4.65.
  - Total: mean 2.03; se(mean) 0.04; p50 1.83; p5 0.20; p95 4.58.
- Interpretation:
  - Average LTI stable over 2014–15 at just above two.
  - Upper tail (95th percentile) of the LTI distribution shrank from 5.00 to 4.58, indicating reduced tail risk, likely in part due to macroprudential measures introduced in 2014.
  - Regional averages broadly uniform (around two), but thicker upper tails in London and the South East.

### Debt service ratio (DSR) distribution and patterns
- Aggregate changes:
  - Average DSR declined from 17.13 percent in 2014 to 16.32 percent in 2015.
  - Table 5 (2014): mean 17.13; se(mean) 0.25; p05 2.94; p50 15.26; p95 37.02.
  - Table 5 (2015): mean 16.32; se(mean) 0.28; p05 3.21; p50 14.70; p95 33.50.
  - Total (2014–2015): mean 16.80; se(mean) 0.19; p05 3.03; p50 15.00; p95 36.00.
- Regional DSR highlights (2015):
  - Greater London: mean 18.43; se(mean) 1.18; p05 3.90; p50 15.10; p95 44.44.
  - South West: mean 17.68; se(mean) 0.91; p05 4.00; p50 17.03; p95 36.00.
  - Total: mean 16.32; se(mean) 0.28; p05 3.21; p50 14.70; p95 33.50.
- Age-group DSR highlights (2015):
  - 25-34: mean 17.61; se(mean) 0.50; p05 6.99; p50 16.00; p95 30.00.
  - 65+: mean 12.24; se(mean) 0.94; p05 0.63; p50 9.93; p95 28.42.
  - Total: mean 16.32; se(mean) 0.28; p05 3.21; p50 14.70; p95 33.50.
- Interpretation:
  - Average DSRs similar across regions (mean around 16 percent), but the upper 5 percent is much higher in London (p95 44.44 percent).
  - Average DSRs broadly stable across age groups, with upper tails declining with age.

### Empirical analysis of repayment difficulties (logit and probit)
- Core findings:
  - Debt service ratio (DSR) is a robust and statistically significant predictor of repayment difficulties in both logit and probit regressions.
    - Logit: DSR coefficients reported include 0.0198**, 0.0237**, 0.0192, 0.0247**, 0.0235**, 0.0239** (standard errors in parentheses; significance denoted).
    - Probit: DSR coefficients reported include 0.0110***, 0.0133***, 0.0105, 0.0138***, 0.0131***, 0.0133*** (standard errors in parentheses; *** p<0.01).
  - LTI coefficients are positive but not robustly significant in the reported specifications (e.g., logit LTI 0.0723 (0.0478); probit LTI 0.0402 (0.0265)).
  - Employment/self-employment status significantly reduces the probability of repayment difficulties:
    - Logit: Employed or self employed coefficient -0.384**, -0.473**, -0.471**.
    - Probit: Employed or self employed coefficient -0.211**, -0.258**, -0.258**.
  - Residing in London has a significant and negative effect on the probability of payment problems (logit London dummy -0.590**; probit London dummy -0.318**).
  - Age is not a significant predictor of repayment problems in these regressions.
- Significance markers: *** p<0.01, ** p<0.05, * p<0.1.

---

### 29. Employment status and debt service ratios are the main variables determining mortgage-payment difficulties
- Key findings:
  - Employment status and debt service ratios (DSRs) are the main variables determining mortgage payment difficulties.
  - Micro-level analysis reveals generational and regional differences in LTI and DSR ratios.
  - The probability of payment difficulties is significantly affected by DSRs and the employment status of the borrower.
  - LTI ratios are correlated with DSR; therefore, limiting high-leverage loans could have beneficial effects on financial stability through improved borrower repayment capacity.

A. Macroprudential Policies — policy recommendations and considerations
- Macroprudential tightening:
  - Macroprudential policies will need to tighten later this year if the recent reacceleration of housing and mortgage markets persists.
  - Tightening could take the form of tighter LTI and/or LTV limits on new mortgages.
- Data consolidation:
  - Priority should be given to consolidation of household-level credit data to allow a shift from LTI limits to DTI limits, which cannot be evaded by taking out multiple loans.
- Help-to-Buy monitoring:
  - Authorities should continue to monitor the help-to-buy program and consider if it needs to be adjusted to avoid adding further to demand for existing houses.
- Extend FPC powers to BTL:
  - BTL market accounted for about one-third of gross mortgage growth since 2012 and is dominated by small-scale landlords (those owning three properties or less).
  - Extending the FPC’s powers of direction would avoid biasing the market toward this segment and enable quicker policy responses.
  - The powers of direction should mirror those the FPC currently has over the owner-occupied market.
  - Somewhat looser restrictions could be considered for borrowing for new construction to avoid unintentionally restricting supply.
- CRE monitoring:
  - CRE warrants close monitoring given buoyancy and annual price growth exceeding 10 percent as of mid-2015.
  - Domestic banks have reduced CRE exposure, but international investors have increased financing flows; a fall in CRE prices could tighten corporate credit constraints, reducing business investment and activity.

B. Addressing supply issues — policy recommendations and rationale
- Continued efforts to address supply constraints are equally important.
- Increased housing supply will:
  - support near-term growth,
  - reduce the need for excessive household leverage,
  - promote social cohesion by lessening wealth inequality,
  - lower the volatility of prices during upswings, assisting in solidifying financial stability.
- Government initiatives: improving incentives for local governments to approve new construction and mobilizing unused publicly-owned lands for construction.
- Authorities should remain vigilant against local-level resistance to implementation; otherwise risks from an approval process perceived as slow and unpredictable will remain.
- Note: The most significant element of the program (The Mortgage Guarantee Scheme) is scheduled to end at end-2016.

C. Data provision — recommended data dissemination
- Dissemination of official data on rental prices and CRE price indices would be welcome.
- CRE and BTL market segments have been growing rapidly, yet no official price indices exist for these sectors.
- Analysts and financial stability stakeholders would likely benefit from officially disseminated data on:
  - regional rental prices in pounds, disaggregated by property type;
  - CRE price indices.

*Prepared by Mico Mrkaic, European Department, IMF (technical note).*

### INTRODUCTION AND OVERVIEW ______________________________________________________________ 4

### INTRODUCTION AND OVERVIEW

### Overview and purpose
- The purpose of this note is to assess the risks to the financial sector that currently emanate from United Kingdom (U.K.) property markets.
- Property market cycles affect balance sheets of households, banks, and other financial institutions and can propagate via the financial accelerator because many firms rely on real estate as collateral.
- Increasing debt associated with property purchases increases vulnerability of indebted property owners to economic shocks with potential knock-on effects on the rest of the economy.

### Recent developments in property markets
- House price growth accelerated over the last 10 months: after slowing to below 6 percent per annum during the first half of 2015, the growth rate of house prices increased to 8 percent in early 2016.
- Mortgage lending growth has not returned to pre-crisis levels; buy-to-let (BTL) lending has grown faster than overall residential property lending.
- The reduction in the share of new high loan-to-income ratio (LTI) mortgages has recently reversed.
- Commercial real estate (CRE) was buoyant: annual price growth peaked in early 2015 at above 10 percent per annum; domestic banks reduced CRE exposures after the recession while international investors now account for more than one half of CRE financing flows.
- Tight supply conditions in housing tightened further after the recession; tight supply and growing demand are main drivers of current house price growth in an environment with otherwise moderate mortgage lending growth.

### Key analytical points
- Excessive lending and price swings in property markets can cause significant distress to both borrowers and lenders; the principal macroeconomic channel includes households cutting back on consumption to service debt, potentially contributing to recessionary forces that adversely affect bank balance sheets through other channels such as CRE defaults.
- The realignment of relative prices of housing reflects restrictive planning regulations, post-recession capacity reduction in construction, and housing completions not keeping pace with new household formation since 2008.
- Low official Bank of England (BoE) rate and global low interest rate environment have contributed to falling mortgage rates across maturities; financial markets expect the Bank rate to remain near the effective lower bound for awhile.

### Data and measurement notes
- Official indices for rental prices and CRE price indices are not available; analysts and financial stability monitoring would benefit from official regional data on rental prices in pounds, disaggregated by property type.

---

### DEVELOPMENTS IN PROPERTY MARKETS — Mortgage rates and prices
- Mortgage rates have continued to fall across all maturities; higher LTV mortgage rates have also recently declined.
- Mortgage rates falling and a low interest rate environment exert upward pressure on property prices, but risks could emerge once interest rates start increasing.
- House price growth timeline: decelerated to about 5 percent per annum during the first half of 2015, then steadily accelerated to 8 percent in early 2016; part of the acceleration possibly linked to urgency before April 1, 2016 implementation of the 3 percent stamp duty surcharge on properties that are not primary residences.
- The percentage of new lending at high LTIs has started to tick back upwards.

### DEVELOPMENTS IN PROPERTY MARKETS — Demand and supply
- Housing transactions and mortgage lending growth remain well below pre-crisis levels despite house prices rising past pre-crisis levels.
- Supply constraints are important drivers: restrictive planning regulations, diminished role of local authorities in housing provision, consolidation and exits among builders, worsened financing conditions for remaining builders, and overall capacity reductions in construction since the great recession.
- Housing completions have not kept pace with new household formation since 2008.

### DEVELOPMENTS IN PROPERTY MARKETS — Rental and commercial properties
- BTL sector expansion: BTL lending grew from 4 percent of mortgage stock in 2002 to 16 percent of the stock in mid-2015; BTL sector mostly small-scale investors with a few properties.
- FPC requested powers of direction over the BTL sector to limit LTV ratios and interest coverage ratios; consultation closed in March 2016 with government decision expected in 2016; PRA published a March 2016 consultation on underwriting standards for BTL mortgage contracts proposing affordability tests and interest rate stress tests for BTL borrowers.
- CRE prices: annual price growth around 10 percent as of mid-2015, with prime London CRE growing rapidly in 2014–15; market slowed in Q1 2016 likely due to Brexit referendum uncertainty.
- BoE analysis shows CRE overvaluation limited to certain prime locations; on average CRE properties do not appear overvalued, but continued rapid price growth could reduce rental yields and increase the probability of price reversals.
- International investors now account for more than one half of CRE financing flows; domestic banks’ reduced CRE exposures lower direct credit risk to domestic banks relative to pre-2008, but CRE price reversals could tighten corporate credit constraints for firms relying on CRE as collateral.

---

### RECENT POLICY DEVELOPMENTS
- Microprudential and macroprudential measures enacted or recommended:
  - Mortgage Market Review (MMR) by the FCA enacted in April 2014 made lenders fully responsible for repayment assessments of all borrowers; FPC recommended affordability assessments stress-tested against a 3 percentage point increase in Bank rate.
  - FPC recommended limiting output of new high LTI mortgages (LTI ratio exceeds 4.5) to 15 percent of lending for each lender.
  - In April 2015, FPC given powers to direct the PRA and the FCA to limit LTV and DTI ratios in the owner-occupied segment.
- Taxation changes affecting BTL (fiscal measures with financial effects):
  - HMT reduced the highest rate at which BTL investors can deduct mortgage interest from their income; measure comes into force in April 2017.
  - HMT introduced higher rates of stamp duty land tax (SDLT) for purchases of additional residential properties; higher rates coming into force on April 1, 2016 are 3 percentage points above existing residential SDLT rates for relevant purchases.

---

### Key policy recommendations (summarized)
- Macroprudential tightening conditional on market developments:
  - Macroprudential policies will need to tighten later this year if the recent re-acceleration of housing and mortgage markets persists; tightening could take the form of tighter LTI and/or LTV limits on new mortgages.
- Regulatory parity across residential markets:
  - Removing asymmetry between buy-to-own and BTL markets in terms of FPC’s regulatory powers should be an important priority; FPC powers of direction over BTL should be essentially equal to those over the buy-to-own market.
- Close monitoring of CRE:
  - CRE warrants close monitoring given rapid price growth (annual price growth exceeding 10 percent as of mid-2015) and the systemic importance of CRE as collateral for firms.
- Address supply constraints:
  - Continued efforts to address supply constraints should continue; increasing housing supply will support near-term growth, reduce the need for excessive household leverage, promote social cohesion by lessening wealth inequality, and lower volatility of prices during upswing periods.

### Data provision recommendation
- Authorities should disseminate official regional data on rental prices in pounds, disaggregated by property type, and CRE price indices to help estimate degree of overvaluation and support financial stability analysis.

*Prepared by Mico Mrkaic, European Department, IMF (technical note).*

### Box 1. House Price Indices

### Box 1. House Price Indices

### Overview and key issues
- Multiple private and official house price indices (HPI) are compiled and disseminated in the U.K., differing in coverage, timeliness, data sources, and statistical methodology, which produces differing estimates of house price levels and growth rates and complicates short-term analyses of price growth and reversals in price trends.
- Official HPIs could be usefully expanded to cover the CRE and BTL markets and to provide average rental prices in pounds; currently, there are no official indices of CRE and BTL prices.
- The ONS has published an experimental index of private housing rental prices (IPHRP) constructed using administrative data collected by the Valuation Office Agency (VOA) and by Scottish and Welsh Governments, but pound values of private housing rental prices are not disseminated, complicating analysis of property market overvaluation.

### Timeliness, coverage, and methodology
- Timeliness:
  - Halifax and Nationwide HPIs: typically released 1 week after the reference period.
  - Office for National Statistics (ONS) HPI: published 6 weeks after the reference period.
  - Her Majesty’s Land Registry (HMLR) HPI: published 4 weeks after the reference period.
- Coverage and data sources (from Table A):
  - Nationwide: Timeliness 1 week; Data source: Mortgage approvals by Nationwide; Quality adjustment: Hedonic regression. 1/ No cash transactions included.
  - Halifax: Timeliness 1 week; Data source: Mortgage approvals by Halifax; Quality adjustment: Hedonic regression. 1/ No cash transactions included.
  - ONS: Timeliness 2/ 6 weeks; Data source: Council of Mortgage Lenders (CML); Quality adjustment: Hedonic regression. 2/ Larger sample of mortgage approvals than Nationwide or Halifax.
  - HMLR: Timeliness 3/ 4 weeks; Data source: HMLR; Quality adjustment: Repeated sales. 3/ Common backward revisions. Includes cash transactions. Excludes new builds, Scotland and Northern Ireland.

### Official developments
- The ONS is developing a new comprehensive HPI that will replace both the current ONS index and the HMLR index; the new index will include both mortgage and cash transactions.
- The ONS will produce and disseminate a time series of past values of the new index to facilitate transition.

### Mortgage lending and market structure findings (selected)
- Mortgage rates: “Mortgage rates have declined to historic lows.” Both fixed and variable rates have declined for gross advances and outstanding balances, lowering debt service ratios while mortgage lending growth remained subdued.
- Fixed-rate lending:
  - The share of new mortgages issued at fixed rates now exceeds 80 percent.
  - The share of outstanding balances of fixed rate mortgages climbed to over 50 percent in late 2015.
  - Most fixed-rate mortgages are short-term fixed mortgages with rates fixed for a period between two and five years.
- Securitization:
  - Securitized outstanding mortgage balances decreased from nearly 230 billion pounds in late 2008 to approximately 80 billion pounds in 2015.
  - Share of securitized mortgages peaked at nearly 19 percent of all mortgages in late 2008 and declined to less than 7 percent by 2015.
  - Implication: lenders increased direct exposures to mortgage lending, potentially increasing lenders’ risk.
- High LTV lending:
  - Share of mortgages with LTV above 95 percent has fallen to well below one percent.
  - Share of mortgages with LTV above 90 percent rose rapidly in 2014 then declined; much of the additional lending at LTV>90 percent in 2014 was almost entirely due to the Help-to-Buy: Mortgage Guarantee Scheme, which largely protects lenders from associated credit losses.
  - The Help-to-Buy: mortgage guarantee scheme is due to end at the close of 2016.
- Impaired credit lending and arrears:
  - Fraction of new mortgage loans extended to individuals with impaired credit history dropped dramatically after 2008 and is presently around 0.2 percent of new mortgage loans (a nearly twenty-fold reduction relative to pre-recession levels).
  - Balance of mortgages extended to individuals with impaired credit histories is less than one percent of current mortgage stock.
  - Mortgage arrears have declined, with the stock of arrears recently below one percent of all loans.

### Household balance sheet vulnerabilities and micro-data insights
- Leverage and vulnerability:
  - Percentage of new mortgages at high LTI ratios above 4.5 remains well above pre-boom levels (circa 2000).
  - Aggregate household DTI ratio has temporarily stopped declining and is higher than in most other G7 countries.
  - High leverage increases exposure to interest-rate, income, and house-price shocks and can amplify an economic slowdown through reduced consumption.
- Micro-data: The NMG housing survey (annual since 2004) provides micro-level LTI and DSR distributions and demographic data used for distributional analysis.

### LTI distribution statistics and regional/age patterns
- Summary statistics for LTI (Table 1: 2014–15):
  - 2014: mean 2.07; se(mean) 0.03; p50 1.77; p5 0.17; p95 5.00.
  - 2015: mean 2.03; se(mean) 0.04; p50 1.83; p5 0.20; p95 4.58.
- Regional LTI summary statistics (Table 2, 2015):
  - East Anglia: mean 2.02; se(mean) 0.11; p50 1.93; p5 0.12; p95 4.17.
  - East Midlands: mean 1.81; se(mean) 0.10; p50 1.71; p5 0.26; p95 3.48.
  - Greater London: mean 2.20; se(mean) 0.12; p50 1.86; p5 0.17; p95 5.52.
  - North: mean 1.76; se(mean) 0.15; p50 1.62; p5 0.26; p95 4.40.
  - North West: mean 1.91; se(mean) 0.10; p50 1.67; p5 0.24; p95 4.33.
  - Scotland: mean 1.84; se(mean) 0.11; p50 1.83; p5 0.17; p95 4.00.
  - South East: mean 2.41; se(mean) 0.11; p50 2.30; p5 0.16; p95 5.00.
  - South West: mean 2.24; se(mean) 0.13; p50 2.10; p5 0.33; p95 4.61.
  - Wales: mean 1.92; se(mean) 0.17; p50 1.71; p5 0.20; p95 4.06.
  - West Midlands: mean 1.83; se(mean) 0.12; p50 1.53; p5 0.29; p95 4.71.
  - Yorkshire and the Humber: mean 1.93; se(mean) 0.11; p50 1.72; p5 0.20; p95 4.70.
  - Total: mean 2.03; se(mean) 0.04; p50 1.83; p5 0.20; p95 4.58.
- Age-group LTI summary statistics (Table 3, 2015):
  - 18-24: mean 1.99; se(mean) 0.15; p50 1.69; p5 0.11; p95 4.65.
  - 25-34: mean 2.61; se(mean) 0.07; p50 2.50; p5 0.64; p95 4.73.
  - 35-44: mean 2.18; se(mean) 0.06; p50 2.08; p5 0.43; p95 4.41.
  - 45-54: mean 1.65; se(mean) 0.07; p50 1.32; p5 0.14; p95 4.38.
  - 55-64: mean 1.38; se(mean) 0.10; p50 1.01; p5 0.09; p95 3.94.
  - 65+: mean 1.73; se(mean) 0.14; p50 1.35; p5 0.15; p95 5.00.
  - Total: mean 2.03; se(mean) 0.04; p50 1.83; p5 0.20; p95 4.58.
- Interpretation:
  - Average LTI stable over 2014–15 at just above two.
  - Upper tail (95th percentile) of the LTI distribution shrank from 5.00 to 4.58, indicating reduced tail risk, likely in part due to macroprudential measures introduced in 2014.
  - Regional averages broadly uniform (around two), but thicker upper tails in London and the South East.

### Debt service ratio (DSR) distribution and patterns
- Aggregate changes:
  - Average DSR declined from 17.13 percent in 2014 to 16.32 percent in 2015 (Table 5).
  - Table 5: 2014 mean 17.13; se(mean) 0.25; p05 2.94; p50 15.26; p95 37.02.
  - Table 5: 2015 mean 16.32; se(mean) 0.28; p05 3.21; p50 14.70; p95 33.50.
  - Total (2014–2015): mean 16.80; se(mean) 0.19; p05 3.03; p50 15.00; p95 36.00.
- Regional DSR summary statistics (Table 4, 2015):
  - East Anglia: mean 15.61; se(mean) 0.83; p05 2.40; p50 14.46; p95 30.43.
  - East Midlands: mean 16.14; se(mean) 0.85; p05 4.80; p50 15.11; p95 29.84.
  - Greater London: mean 18.43; se(mean) 1.18; p05 3.90; p50 15.10; p95 44.44.
  - North: mean 15.86; se(mean) 1.13; p05 4.94; p50 14.59; p95 31.76.
  - North West: mean 15.22; se(mean) 0.68; p05 2.65; p50 14.02; p95 30.27.
  - Scotland: mean 14.51; se(mean) 0.87; p05 3.07; p50 13.66; p95 30.00.
  - South East: mean 17.51; se(mean) 0.75; p05 2.82; p50 16.00; p95 37.50.
  - South West: mean 17.68; se(mean) 0.91; p05 4.00; p50 17.03; p95 36.00.
  - Wales: mean 17.28; se(mean) 1.42; p05 2.67; p50 14.62; p95 38.00.
  - West Midlands: mean 15.24; se(mean) 0.76; p05 3.79; p50 13.85; p95 27.50.
  - Yorkshire and the Humber: mean 15.19; se(mean) 0.76; p05 3.38; p50 13.75; p95 31.44.
  - Total: mean 16.32; se(mean) 0.28; p05 3.21; p50 14.70; p95 33.50.
- Age-group DSR summary statistics (Table 6, 2015):
  - 18-24: mean 16.63; se(mean) 1.07; p05 4.43; p50 14.26; p95 40.00.
  - 25-34: mean 17.61; se(mean) 0.50; p05 6.99; p50 16.00; p95 30.00.
  - 35-44: mean 17.33; se(mean) 0.55; p05 4.35; p50 15.64; p95 36.00.
  - 45-54: mean 15.93; se(mean) 0.59; p05 2.70; p50 14.05; p95 34.00.
  - 55-64: mean 14.26; se(mean) 0.86; p05 1.18; p50 11.48; p95 36.36.
  - 65+: mean 12.24; se(mean) 0.94; p05 0.63; p50 9.93; p95 28.42.
  - Total: mean 16.32; se(mean) 0.28; p05 3.21; p50 14.70; p95 33.50.
- Interpretation:
  - Average DSRs similar across regions (mean around 16 percent), but the upper 5 percent is much higher in London (p95 44.44 percent).
  - Average DSRs broadly stable across age groups, with upper tails declining with age.

### Empirical analysis of repayment difficulties (logit and probit)
- Core findings from limited dependent models (logit and probit) using NMG data:
  - Debt service ratio (DSR) is a robust and statistically significant predictor of repayment difficulties in both logit and probit regressions.
    - Logit: DSR coefficients reported include 0.0198**, 0.0237**, 0.0192, 0.0247**, 0.0235**, 0.0239** (standard errors in parentheses; significance denoted).
    - Probit: DSR coefficients reported include 0.0110***, 0.0133***, 0.0105, 0.0138***, 0.0131***, 0.0133*** (standard errors in parentheses; *** p<0.01).
  - LTI coefficients are positive but not robustly significant in the reported specifications (e.g., logit LTI 0.0723 (0.0478); probit LTI 0.0402 (0.0265)).
  - Employment/self-employment status significantly reduces the probability of repayment difficulties:
    - Logit: Employed or self employed coefficient -0.384** and -0.473** and -0.471** (with standard errors).
    - Probit: Employed or self employed coefficient -0.211** and -0.258** and -0.258**.
  - Residing in London has a significant and negative effect on the probability of payment problems (logit London dummy -0.590**; probit London dummy -0.318**).
  - Age is not a significant predictor of repayment problems in these regressions.
- Regression constants and significance levels are reported in the source tables; standard errors are in parentheses. Significance markers: *** p<0.01, ** p<0.05, * p<0.1.

*Source: IMF staff summary of Box 1. House Price Indices, extracted from the referenced IMF PDF.*

### 29.      Employment status and debt service ratios are the main variables determining

### 29.      Employment status and debt service ratios are the main variables determining

### Key findings on household mortgage-payment difficulties
- Employment status and debt service ratios (DSRs) are the main variables determining mortgage payment difficulties.
- Micro-level analysis of household indebtedness reveals generational and regional differences in LTI and DSR ratios.
- The probability of payment difficulties is significantly affected by DSRs and the employment status of the borrower.
- LTI ratios are correlated with DSR; therefore, limiting high-leverage loans could have beneficial effects on financial stability through the ability of borrowers to repay their loans in an orderly fashion.

### A. Macroprudential Policies — policy recommendations and considerations
- Macroprudential policies will need to tighten later this year if the recent reacceleration of housing and mortgage markets persists.
- If needed, such tightening could take the form of tighter LTI and/or LTV limits on new mortgages.
- Priority should be given to the consolidation of household-level credit data to allow a shift from LTI limits to DTI limits, which cannot be evaded by taking out multiple loans.
- The authorities should continue to monitor the help-to-buy program and consider if it needs to be adjusted to avoid adding further to demand for existing houses.
- The authorities should extend the FPC’s powers of direction to the BTL market:
  - The BTL market has accounted for about one-third of gross mortgage growth since 2012 and is dominated by small-scale landlords (those owning three properties or less).
  - Extending the FPC’s powers of direction would avoid biasing the market toward this segment and enable quicker policy responses.
  - The powers of direction should mirror those the FPC currently has over the owner-occupied market.
  - Somewhat looser restrictions could be considered for borrowing for new construction to avoid unintentionally restricting supply.
- CRE (commercial real estate) warrants close monitoring:
  - The CRE market has been buoyant, with annual price growth exceeding 10 percent as of mid-2015.
  - Domestic banks have reduced their CRE exposure, but international investors have picked up the slack.
  - CRE is particularly sensitive to swings in sentiment about economic prospects; a fall in prices could tighten corporate credit constraints, reducing business investment and economic activity.

### B. Addressing supply issues — policy recommendations and rationale
- Continued efforts to address supply constraints are equally important.
- Increased housing supply will:
  - support near-term growth,
  - reduce the need for excessive household leverage,
  - promote social cohesion by lessening wealth inequality, as rising house prices have been a key contributor to the latter in the U.K.
  - lower the volatility of prices during upswings, assisting in solidifying financial stability.
- The government has undertaken initiatives to boost housing supply, such as improving incentives for local governments to approve new construction.
- Authorities should remain vigilant against local-level resistance to effective implementation of these initiatives; otherwise risks associated with an approval process perceived by many to be slow and unpredictable will remain.
- Authorities should continue efforts to mobilize unused publicly-owned lands for construction.
- Note: The most significant element of the program (The Mortgage Guarantee Scheme) is scheduled to end at end-2016.

### C. Data provision — recommended data dissemination
- Dissemination of official data on rental prices and CRE price indices would be welcome.
- The CRE and BTL property market segments have been growing rapidly, yet there are no official indices of prices for these sectors.
- Analysts and financial stability stakeholders would likely benefit from officially disseminated data on:
  - regional rental prices in pounds, disaggregated by property type;
  - CRE price indices.
- Such data would help estimate the degree of overvaluation of house prices.

*UNITED KINGDOM — INTERNATIONAL MONETARY FUND.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16157.pdf_