The Bank of England has published a research paper that develops a new framework for assessing the risks associated with house prices, providing policymakers with a more sophisticated tool for understanding the relationship between the housing market and financial stability.
The paper develops a "house price at risk" framework that estimates the probability distribution of future house prices rather than a single central forecast. The framework, which is modelled on the "growth at risk" approach that central banks have developed for assessing the risks to economic growth, allows policymakers to quantify the likelihood of large falls in house prices and to assess the implications of such falls for financial stability.
The paper finds that the risk of a significant fall in UK house prices is currently moderate but elevated by historical standards. The combination of high house prices relative to incomes, elevated interest rates and subdued economic growth creates conditions in which a shock to confidence or employment could trigger a correction.
The framework is designed to inform the Bank's assessment of financial stability and its calibration of the regulatory tools that are designed to protect the financial system from risks originating in the housing market. The Bank said the framework would be refined as more data became available and would be integrated into its regular financial stability assessment.
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