BOE Sees Global House Prices Falling, Warns on China Risks - BLOOMBERG
(Bloomberg) -- The Bank of England warned that house prices are likely to fall further in many economies and flagged significant downside risks in the Chinese property market.
A further deterioration in activity and prices could pose risks to the Chinese economy and financial sector, which could spill over into the UK and other jurisdictions, the central bank said in a record of its Financial Policy Committee meetings held in late September and early October, which was released on Tuesday.
The FPC will continue to monitor closely developments in Chinese and Hong Kong property markets ”and the potential for spillovers to UK financial stability,” the committee said.
The panel also noted that UK household finances remain under pressure after successive BOE interest-rate increases since 2021 to tame inflation.
The share of households with high debt-servicing ratios is expected to keep rising next year. Yet this level will likely stay below the historic peak reached during the global financial crisis in 2007, the committee predicted. In the UK, the proportion of new mortgage lending for 35 years or more has increased by 8 percentage points to 12% between the first quarter of 2021 and the second quarter of 2023. For private renters in Britain, rents rose by 5.5% in the year to August.
New floor space sold in China each month has fallen by nearly a half from the levels seen in January to June in 2021, and real estate investment has dropped by nearly a fifth to August year-on-year.
Other key points from the report:
—Some risky asset valuations, for example for tech stocks and high-yielding debt, appear stretched. These valuations could increase the likelihood of a greater correction in prices if downside risks to growth materialize.
—The BOE will run a ”desk-based” stress test exercise rather than an annual cyclical scenario in 2024. This will use bank models and expertise to test the resilience of the banking system and will allow for more than one adverse macroeconomic scenario.
—The countercyclical capital buffer rate will remain at 2%.
—Hedge funds continue to maintain leveraged positions in US Treasuries, including in the cash-futures basis trades that contributed to dysfunction in the Treasury market in March 2020. The committee will continue to monitor the risks.