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Carney Details New Weapons to Cool British Housing Market Carney Details New Weapons to Cool British Housing Market
(about 1 hour later)
LONDON — Mark J. Carney, the governor of the Bank of England, announced measures on Thursday to try to cool England’s blistering housing market. LONDON — Mark J. Carney, the governor of the Bank of England, announced measures on Thursday to try to cool England’s blistering housing market, a sector that he and other policy makers have identified as the greatest potential threat to Britain’s economic recovery.
Speaking at the twice-yearly review of the country’s financial stability, Mr. Carney said the Financial Policy Committee, formed to help curb the boom and bust cycle of recent years, would use its tools to try to slow the pace of individuals’ taking on too much debt relative to their incomes, and to require banks to ensure that borrowers could repay their loans if interest rates rose. Mr. Carney said that while the housing boom did not currently imperil the country’s economic and financial stability, the new policies would act as insurance against potential future overheating.
The committee moved to restrict the number of new residential mortgages that were equivalent to, or more than, 4.5 times a borrower’s annual income. The panel said that banks could have no more than 15 percent of such loans in their portfolios. “We have seen time and again how quickly ‘responsible’ can turn to ‘reckless,’ creating risks that ultimately derail the U.K. economy,” he said.
The committee also said that mortgage lenders, when assessing affordability, should apply a stress test to determine if borrowers could afford the loan if interest rates were to rise three percentage points higher in the first five years of the loan. The bank’s Financial Policy Committee, formed to help curb persistent boom-and-bust cycles, moved to restrict the number of new residential mortgages that were equivalent to, or more than, 4.5 times a borrower’s annual income. The panel said that banks could have no more than 15 percent of such loans in their portfolios.
Home prices in Britain have risen about 10 percent in the past year through April, leading to widespread fear of a potential asset bubble. The committee also said that mortgage lenders, when assessing affordability, should apply a stress test to determine if borrowers could still pay the loan if interest rates rose three percentage points higher in the first five years of the loan.
The committee’s report underscored that the recovery in the British housing market has been associated with a “marked rise in the share of mortgages extended at high loan-to-income ratios.” Mr. Carney said the new lending rules “should not restrain current housing market activity” but would kick in if house prices continued to rise drastically or incomes failed to grow.
Still, Mr. Carney said the committee did not believe that current household indebtedness posed an imminent threat to stability. And he said the new lending rules “should not restrain current housing market activity.” The bank is trying to balance maintaining the country’s strong economic recovery against reining in a housing market that blossomed during a period of loose monetary policy. For five years, that policy has flooded the financial system with cheap loans.
Banks now do not exceed the new loan-to-income caps, he said, but the limits will prevent lending from getting too far ahead of income growth. Some analysts saw the measures as more tentative than the market was anticipating. “In reality, the latest measures introduced by the Bank of England are practices that are already being followed by many lenders,” said Howard Archer, chief United Kingdom and European economist at IHS Global Insight.
“What these mean is that the shift from the responsible lending that we are seeing today into reckless widespread high loan-to-income and loan-to-value lending tomorrow — a shift we have seen countless times — that can’t happen,” Mr. Carney said. “There’s a cap.” He noted that both the Lloyds Banking Group and Royal Bank of Scotland had already announced that they would limit mortgages to a maximum of four times a borrower’s annual earnings when lending more than 500,000 pounds, or about $849,000, on a property.
Some analysts saw the measures as more tentative than the market was anticipating, and the pound rose slightly against the dollar to more than $1.70. Like the United States, Britain has an inglorious history of housing booms and busts. Propelled by record low interest rates — now at 0.5 percent, which is the lowest since the Bank of England was founded in 1694 — Britain’s housing market has taken off. Home prices jumped about 10 percent in the last year through April.
The committee’s report underscored that the recovery in the housing market has been associated with a “marked rise in the share of mortgages extended at high loan-to-income ratios.”
At present, banks are not exceeding the new loan-to-income cap. Only 10 percent of mortgages issued in the 12 months through March exceeded the ratio of 4.5 times a borrower’s annual income. That ratio is far more stark in London, where about 22 percent of mortgages are above the cap, meaning the impact could be more widely felt in the city, said Christian Schulz, senior economist at Berenberg Bank.
The moves take the Bank of England into uncharted territory as it seeks to use relatively new and untested supervisory powers to curb market distortions.The moves take the Bank of England into uncharted territory as it seeks to use relatively new and untested supervisory powers to curb market distortions.
The Financial Policy Committee, officially formed in 2013, has so-called macro-prudential powers to remove or reduce systemic risks in the financial system, including imposing lending rules and conducting stress tests on banks to see how financial institutions would weather a major correction. The Financial Policy Committee has so-called macroprudential powers to remove or reduce systemic risks in the financial system, including imposing lending rules and conducting stress tests, currently underway, to see how financial institutions would weather a major correction.
According to the committee’s Financial Stability Report, British banks are more solidly capitalized today, with higher capital ratios achieved through raising new capital and a reduction in noncore assets. Andrew Tyrie, chairman of the Treasury Select Committee, said the committee’s decision was significant. Two years ago, he noted, the central bank seemed reluctant to use tools that targeted loan-to-income ratios, questioning whether there had been sufficient debate about their effectiveness.
The committee is trying to sustain an economic recovery while also reining in a housing market that blossomed during a period of loose monetary policy that has flooded the financial system for five years with cheap loans. “The bank has now signaled that it may act vigorously to head off the economic and financial stability risks that may arise from an overheating housing market,” he said.
Bankers all week have been cautioning against rash action. Ross McEwan, chief executive of the Royal Bank of Scotland, in which the British government owns a majority stake, suggested on Wednesday that banks could be trusted to control their own mortgage lending. “We don’t think there’s a big problem out there,” he said. “Our preference is we make the move.” According to the committee’s Financial Stability Report, British banks are now more solidly capitalized. Capital raising and a reduction in noncore assets have contributed to the bigger cushions.
The British Bankers’ Association has cautioned against the committee’s introducing draconian measures, noting that the housing market was showing signs of slowing. The association’s data shows that mortgage approvals have fallen for four successive months. Additional measures required by British regulators to ensure that banks have sufficient capital buffers will now be removed, and banks will be required to comply only with international standards, called Basel III.
At a speech this month at Mansion House, the official residence of the Lord Mayor of London, Mr. Carney said that the housing market was the greatest threat to England’s surprisingly strong economic recovery. George Osborne, the chancellor of the Exchequer, struck a similar note. The British Bankers’ Association had cautioned against the committee’s introducing draconian measures, and it called Thursday’s announcement a “cautious and clever intervention” that will have little effect on the market in the short-term, “but sets an important backstop to ensure indebtedness does not get out of control.”
But questions remain about how the committee’s efforts will play out when interest rates rise from current lows. The association has recently pointed to signs that the housing market is slowing, noting that mortgage approvals have fallen for four successive months, in part in response to policy measures taken this year.
Mr. Carney has been put under an uncomfortable spotlight over when the central bank will increase its benchmark lending rates. At the Mansion House speech, Mr. Carney upended Mr. Osborne’s housing and banking policy pronouncements by saying that interest rates could rise “sooner than markets presently expect.” Questions now remain about how the central bank’s efforts will play out when interest rates rise from current lows.
Economists and traders quickly shifted gears to expect an increase in benchmark lending rates this autumn rather than early next year, as the market had been predicting. Analysts say that Mr. Carney’s approach to guiding the markets toward when rates would rise has been unclear. At a speech delivered to bankers this month, he said that interest rates could rise “sooner than markets presently expect.”
But then on Tuesday at a hearing by the Parliament’s Treasury committee, Mr. Carney struck a seemingly different note. He said that the most recent data showed average real wages had contracted again in April, indicating to him that the economy had more slack between what it could produce and what it was producing. But then on Tuesday at a hearing by the Parliament’s Treasury Committee, he struck a seemingly different note. He said that the most recent data showed average real wages had contracted again in April, indicating that the economy had more slack between what it could produce and what it was producing.
The bank, in its second or third iteration of forward guidance, has said it will raise rates partly in response to slack’s disappearing from the market. The measures introduced may buy the bank more time before it is forced to raise rates. Yet it will be hard pressed to address a crucial component bolstering the exuberant housing market: lack of supply.
Mr. Carney maintained on Tuesday that the time to “normalize interest rates” — away from the historically low 0.5 percent — was “edging closer.” “In the end, the only things that will really cool the market are putting up rates and building thousands more homes — now,” Eversheds, a British law firm, said.
Already Mr. Carney’s projections have proved challenging, and short lived. His first version of forward guidance said rates would stay the same until unemployment fell below 7 percent. But when that happened sooner than expected, he scrapped that policy for one based on slack, or “spare capacity.”
His Mansion House comments caused the pound to rise against the dollar. His comments to the Treasury committee caused it to slide.
The about-face caused the Labour Party member Pat McFadden to suggest that the British central bank had been behaving like an “unreliable boyfriend,” who was “one day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand.”
Andrew Tyrie, the Tory minister who is chairman of the Treasury committee, said that since Mr. Carney became governor, he had seen “quite a lot of guidance, not all of it seeming to point in the same direction.”
The Bank of England said Mr. Carney’s earlier comments, including the inflation report in May and the Mansion House speech, were consistent with the message he has been delivering.