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Banks To Be Stress Tested On 35% Drop In House Prices

Banks To Be Stress Tested On 35% Drop In House Prices

Banks Stress Tested On 35% Drop In House Prices
And 5% Rise In Interest Rates

UK and Continental banks are to be stress tested using a worst case scenario in an effort to assess if they could cope with a house price slump of 35% or a sudden spike in interest rates to more than 5%, the exercise will be monitored by the Bank of England.

Sky News broke the story on Monday ahead of an official announcement on Tuesday by the Prudential Regulation Authority (PRA), after learning that banks would be subjected to an armageddon style scenario to see if they have sufficient capital to withstand another economic slump.

A series of commercial real estate losses is expected to be applied to the banks’ balance sheets as part of the tests, but it’s not certain whether or not the interest rate hike will be quantified as part of the tests, but the 35% slump in property prices could reveal if banks and building societies would need to raise billions of pounds of fresh capital to survive, unless they can demonstrate their ability to withstand such a huge slump.

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RICS Warns Of Another Property Bubble If Property Prices Increase By More Than 5%

RICS Warns Of Another Property Bubble If Property Prices Increase By More Than 5%

RICS Want To Cap Property Price Increases 

RICS want the Bank of England’s Financial Policy Committee (FPC) to consider limiting annual house price inflation to just 5% in order to prevent another housing bubble.

According to research by the Royal Institute of Chartered Surveyors (RICS), excessive property price growth and high mortgage lending have left the banking sector vulnerable and specific policy on limiting property price growth is required to prevent another property price bubble.

RICS have suggested caps on elements such as:

  • Loan-To-Value (LTV) ratios
  • Loan-To-Income ratios
  • Mortgage durations
  • Ceiling limits on the amount banks are permitted to lend (should prices exceed a given limit)

RICS reckon that by sending such a clear and simple statement to the public, indicating that the Bank of England (BoE) will not tolerate property price rises over 5%, would help restrict excessive price expectations across the country, preventing property prices from over-inflation.

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