Jon Cunliffe: UK property obsession threatens to push up household debt pile

The FPC took steps this week to try to stop household debt, forecast by the Office for Budget Responsibility to grow from 140pc of average household income to 170pc within five years, from becoming unsustainable. Lenders have been told to issue no more than 15pc of new mortgages worth more than 4.5 times a buyer's income and "stress test" borrowers' ability to pay their mortgage even if interest rates were three percentage points higher.

Sir Jon also said interest rates were the wrong tool to cool the housing market. In a set of dovish comments, he warned that using monetary policy even as a "last line of defence" to address financial stability issues had a "cost".

"If, over time, the only way you can deal with a financial stability risk is to divert monetary policy from the job of steering the economy to the job of dealing with the risk in the housing sector … there's a cost to that, because you would be optimising it for one sector rather than for the economy as a whole."

Last month, Sir Charlie Bean, the Bank's outgoing deputy governor for monetary policy said that while raising interest rates would be a "blunt tool for addressing financial stability risks … it does have the virtue that it gets in all of the cracks".

While Sir Jon agreed with this statement, originally quoted by former Federal Reserve board member Jeremy Stein, he added: "We could put up interest rates, and that could slow the market. It does get in all the cracks in the housing market … and it deals with consumption generally. But maybe the answer is that it gets in too many cracks, because it's economy wide and we have a sector-specific problem."

Meanwhile, Mark Carney, the Governor of the Bank suggested on Friday that the new "normal" for interest rates was likely to be around 2.5pc when rates start to increase.

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