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Bank of England moves to limit large loans to housebuyers Bank will not act on house prices yet, says Carney
(about 7 hours later)
The Bank of England signalled on Thursday that it would not impose draconian measures to cool the housing market unless house prices rise by more than 20% over the next three years. The Bank of England signalled that it would not impose draconian measures to cool the housing market unless house prices rise by more than 20% over the next three years.
Governor Mark Carney imposed the first limits on the mortgage market – restricting the amount that homeowners can borrow relative to their income and tightening the affordability tests would-be homeowners face when applying for a mortgage – but he acknowledged there would be no immediate impact on fast-rising property values. Governor Mark Carney announced the first limits on the mortgage market in 30 years – restricting the amount that homeowners can borrow relative to their income and tightening the affordability tests would-be homeowners face when applying for a mortgage – but he acknowledged there would be no immediate impact on fast-rising property values.
"These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the bank's central view," Carney said. Presenting the Bank's half-yearly assessment of risks to the financial system, Carney said that UK households start from a "vulnerable position" with debt at 140% of disposal income. "This is the limits of our tolerance and that's why there is a cap in place. We will evaluate [and] if we need to recalibrate, we will," he said.
The Bank calculates that its new measures will only start to have an effect if house prices rise more than 20% between now and the first quarter of 2017.
Lenders and house builders were relieved that Threadneedle Street had not taken more drastic steps. The mortgage industry had been braced for tougher action from the Bank after the chancellor used his Mansion House speech earlier this month to give Carney new powers to prevent a fourth bubble in the housing market since the early 1970s.
Carney said the Bank was aware of the risks of reckless lending but said a "graduated and proportionate" response was called for.
"These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the Bank's central view," he said.
The governor said they would only bite "if there is sustained momentum in the housing market over the coming years and that's accompanied by further sharp increases in high loan to income lending".The governor said they would only bite "if there is sustained momentum in the housing market over the coming years and that's accompanied by further sharp increases in high loan to income lending".
House prices in London have already breached their 2007 peak and the bank now expects house price inflation to remain at similar levels for the next 12 months. Its forecasts suggest it would be relaxed about house prices rising 20% over the next three years. While lenders agreed that the new measures would not immediately affect the market, the policy nevertheless breaks new ground as a result of regulatory changes introduced by the coalition government after the 2008 banking crisis.
The Bank of England is restricting banks' and building societies' ability to lend out more than 15% of their mortgages to customers needing to borrowing four and half times their income – a move that it acknowledges will not have an immediate impact as no lender currently is hitting such a ceiling. Under the measures announced on Thursday, The Bank of England's financial policy committee – set up to monitor risks after the crash of 2008 – is restricting banks' and building societies' ability to lend out more than 15% of their mortgages to customers needing to borrowing four and half times their income.
As well as imposing a limit on the amount lent by banks and building societies, the bank is also slightly tightening the interest rate being imposed on new borrowers through the new mortgage market review which tests customers' ability to repay their loans. The bank also acknowledged that the demand that customers' ability to repay a loan at interest rates three percentage points higher than prevailing market expectations was similar to the current "stress" of a 7% interest rate imposed by most lenders. It acknowledges the move will have no immediate impact as no lender is currently at that ceiling. The same limit will be imposed on mortgages covered by the government's help to buy scheme, designed to encourage lending.
"This action is designed specifically as insurance against the risk that there is greater momentum in the housing market than currently anticipated and that, as a result, lenders face growing demand for loans at very high loan to values," the Bank said in its half-yearly financial stability report. The Bank is tightening the interest rate being imposed on new borrowers through a mortgage market review which tests customers' ability to repay their loans. This is similar to the current "stress" of a 7% interest rate imposed by most lenders.
Carney added: "These actions will bite if there is sustained momentum in the housing market over the coming years and that's accompanied by further sharp increases in high loan to income lending." Economists at Capital Economics said it was a "missed opportunity" to make homes more affordable.
There was some scepticism that the Bank's moves would dampen the market, reflected in a jump in share prices of Britain's leading housebuilders immediately after the statement. Persimmon, Barratt Developments and Travis Perkins all rose between 3% and 4%. The Bank also pointed to the lack of supply of housing which was 110,000 in 2013 – below the 180,000 average of 2000 to 2007. House prices in London have breached their 2007 peak and the Bank expects house price inflation to remain at similar levels for the next 12 months.
Lucian Cook, head of residential research at Savills UK, said: "The measures put in place today are clearly designed to limit banks' exposure to lending that will pose risks in a higher interest environment rather than cool the market per se. Accordingly the measures announced today are not nearly as draconian as they might have been had the FPC applied absolute loan to value or loan to income caps at an individual mortgage level." Andrew Tyrie, the Conservative MP who chairs the Treasury select committee, was supportive of the Bank's step by step approach but said the FPC was largely unknown to the public. "Further use of tools such as these could, in the long run, have a big effect on millions of people."
In its half-yearly financial stability report, the FPC said: "This action is designed specifically as insurance against the risk that there is greater momentum in the housing market than currently anticipated and that, as a result, lenders face growing demand for loans at very high loan to values," the Bank said.
"The FPC does not believe that household indebtedness poses an imminent threat to stability. But it has agreed that it is prudent to insure against the risk of a marked loosening in underwriting standards and a further significant rise in the number of highly indebted households."
Share prices of Britain's leading housebuilders Persimmon and Barratt Developments were among the biggest risers in the FTSE 100, gaining almost 5% on relief that there was no immediate clampdown. The Bank underscored lack of supply, with 110,000 new homes built in 2013 – below the 180,000 average of 2000 to 2007.
Lucian Cook, head of residential research at Savills UK, said: "The measures announced today are not nearly as draconian as they might have been had the FPC applied absolute loan to value or loan to income caps at an individual mortgage level."
Bailed out banks Lloyds Banking Group and Royal Bank of Scotland have already taken steps to limit some lending to four times a customers' income. Lloyd Cochrane, head of mortages at RBS said he expected no significant impact on its lending.
Carney rebuffed suggestions the Bank was not taking swift action to tackle potential risks, saying: "This is action. We're acting early. We can do it in a way that doesn't slow the economy."Carney rebuffed suggestions the Bank was not taking swift action to tackle potential risks, saying: "This is action. We're acting early. We can do it in a way that doesn't slow the economy."
The Bank is more concerned about a potential rise in the indebtedness of would-be housebuyers who may be tempted to borrow increasing sums for mortgages compared with their income. Carney said that UK households start from a "vulnerable position" with debt at 140% of disposal income. "This is the limits of our tolerance and that's why there is a cap in place. We will evaluate [and] if we need to recalibrate, we will," he said.
Carney has already welcomed new powers announced by George Osborne, who is relying on policymakers to ensure there is no risk to the financial system from rising house prices.
Making its half-yearly assessment of risks to the financial system, the Bank's financial policy committee said: "The FPC does not believe that household indebtedness poses an imminent threat to stability. But it has agreed that it is prudent to insure against the risk of a marked loosening in underwriting standards and a further significant rise in the number of highly indebted households."
The bank is relaxed about house prices rising 20% between now and the first quarter of 2017, according to its central forecast, which has a top end of 45%. It expects annual house price inflation to remain at current levels until the middle of 2015.
Its policymakers are concerned that a rise in indebtedness could pose a risk to financial stability if customers are unable to keep paying. The proportion of mortgages to borrowers with multiples greater than 4.5 has risen to 11%, and is particularly high among borrowers in London, the Bank said.
"The measure is designed to capture risks associated with excessive household indebtedness. It is not designed to capture all aspects of credit risk associated with the borrower or the other factors that a lender might take into account for the purpose of the lending decision," the Bank said.
It added: "Although a single firm undertaking very high loan-to-income lending may not itself pose risks to the financial system, the aggregate effect of many firms undertaking such lending could pose a risk."
The Bank's systemic risk system reported that "the perceived probability of a high-impact event in the UK financial system has fallen to its lowest level since the crisis". But there were signs that investors, in searching for better returns, may be increasing the financial system's vulnerability to shocks.