UK House Builders Hit by Carney, Osborne Comments on Property Market

By Ed Ballard

LONDON--Shares in U.K. house builders dropped sharply Friday after the governor of the Bank of England signaled that interest rates could rise soon and George Osborne said he would give the bank powers to restrict mortgage lending.

Addressing bankers and business leaders Thursday, Mark Carney said real estate presented "the greatest risk to the domestic economy" and warned that a rate rise "could happen sooner than markets currently expect."

Mr. Osborne, the Chancellor of the Exchequer, pledged to let the Bank of England limit the size of mortgage a potential buyer can borrow relative to their incomes and the value of the property.

Shares in Persimmon PLC (PSN.LN), the U.K.'s biggest builder by market value, were down 6.53% at 1317, while Barratt Developments PLC (BDEV.LN) was down 6.71%, the most in the blue-chip FTSE 100 index. Taylor Wimpey PLC (TW.LN), Bellway PLC (BWY.LN), Telford Homes PLC (TEF.LN) and Berkeley Group Holdings PLC (BKG.LN) all lost more than 5%.

The threat of rate increases was unexpected in light of data showing the government's Mortgage Market Review--which requires banks to apply stricter affordability tests before lending to home buyers--could be cooling the U.K.'s housing market, wrote Gerard Lane, an analyst at Shore Capital.

Data released by the Royal Institute of Chartered Surveyors Thursday showed that enquiries from new buyers eased in May, while surveyors' price expectations fell--even as data from Halifax published last week showed the price of the average home rose 8.7% in May from a year earlier.

"To us this indicates the potential of non-interest rate policy in effecting a slowdown in housing related activity, which in our view could be used to dampen the housing market without impacting the likes of business investment spending in the way that interest rates would," Mr. Lane wrote. "Risks of an interest rate rise would undermine further the likes of the general retail sector and the house builders."

Write to Ed Ballard at [e-mail]