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Bank of England refocuses funding for lending scheme to avoid housing bubble Bank of England steps in amid fears of a new house price bubble
(about 7 hours later)
A scheme to bolster mortgage lending that was only introduced last year is being scaled back as the Bank of England takes the first steps to prevent a housing bubble. The Bank said it will increase its surveillance of the housing market – a move that prompted fears that mortgage rates could rise. The governor of the Bank of England on Thursday reined in the mortgage market as he sought to prevent five years of ultra-low interest rates and George Osborne's Help to Buy scheme from fuelling a pre-election housing bubble.
The surprise move, which Bank of England governor Mark Carney said was taken jointly with chancellor George Osborne, means that the funding for lending (FLS) scheme – which makes it cheaper for banks to fund lending – will now focus on business loans until the end of January 2015. The FLS for home loans end a year earlier than planned, in January 2014. Amid concerns that the UK is in the early stages of a new property boom, Mark Carney announced he was refocusing the Funding for Lending (FLS) scheme that gave lenders financial incentives to provide home loans.
While stressing that the housing market is not an immediate risk to financial stability, Carney announced a series of measures to calm the mortgage market including imposing tougher tests on customers before they are granted home loans. The governor said it was "no longer appropriate or necessary for us to have our foot on the accelerator, better to shift into neutral". He said it was time to focus FLS on small businesses. The decision had been taken with the chancellor, he said.
Among the other attempts to keep a check on the housing market, the Bank said the annual health check of Britain's banking sector being introduced next year will now require banks to look at their resilience to housing shocks. "By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later," Carney said. The governor stressed that the housing market is not an immediate risk to financial stability. But he admitted that financial policymakers were concerned about the "prospective evolution" of the market amid forecasts of a 10% rise in house prices next year on top of a near-7% increase in the past 12 months.
Explaining the decision to remove mortgages from the FLS scheme next year, Carney, said it was "no longer appropriate to have our foot on the accelerator, better to shift it to neutral". The TUC said the move would "hit the feelgood factor" Osborne has been trying to create before the 2015 general election and prompted speculation that the move to end a key part of the FLS had been taken reluctantly by the chancellor. Osborne said: "Now the housing market is starting to pick up, it is right we focus the scheme's firepower on small businesses. Small firms are the lifeblood of our economy."
The TUC said the move would "hit the feelgood factor" that Osborne has been trying to create before the 2015 general election and prompted speculation that the move to end a key part of the FLS had been taken reluctantly by the chancellor. Some economists were sceptical that the withdrawal of the FLS would have a major impact. Others warned it could spell the end of the low mortgage rates that customers have enjoyed and that are said to be helping to propel house prices higher.
Osborne said: "Now that the housing market is starting to pick up, it is right that we focus the scheme's firepower on small businesses. Small firms are the lifeblood of our economy." More than £1bn was wiped off the value of housebuilders after Carney's remarks – Barratt Developments fell almost 10% and Persimmon 6% – on fears that ending FLS might backfire. Sterling rose on expectations of interest-rate rises, although economist James Knightly at City bank ING said the aim of the policymakers was to have the opposite effect.
More than £1bn was wiped off the value of housebuilders – Barratt Developments fell almost 10% and Persimmon 6% – though some economists were sceptical that the withdrawal of the FLS would have a major impact. A Treasury panel of forecasters expects house price rises of up to 10% in 2014. They rose 6.8% in the 12 months to October. The FLS provided an immediate boost to mortgage lending when it launched in August 2012 and has since been supplemented by the chancellor's Help to Buy scheme, which offers subsidised home loans up to £600,000.
Cathy Jamieson, shadow financial secretary to the Treasury, said: "We called for the scheme to prioritise lending to business and, after three wasted years when net lending to firms has fallen, the government is belatedly acting. But homeowners facing a cost-of-living crisis will want reassurance from ministers that suddenly taking the scheme away from mortgage lending won't see a rise in mortgage rates". Help to Buy will be unaffected by the package of measures announced by the Bank of England on Thursday. Other changes designed to keep a close watch on the housing market include imposing tougher "affordability" tests on consumers before they are granted home loans and ensuring that annual financial health checks on banks include the impact of major shocks in the housing market.
In a letter to Osborne, Carney set out the changes to the FLS, which has led to a fall in bank funding costs since it was introduced in July 2012. The surprise move to refocus FLS means that until the scheme ends, in January 2015, it will now be used only for business loans. The FLS for home loans will end a year earlier than planned, in January 2014.
Carney said that the FLS would try to focus more on lending to the business sector, and a relaxation in capital rules that had been applied to mortgage lending would be removed. Cathy Jamieson, shadow financial secretary to the Treasury, said: "We called for the (FLS) to prioritise lending to business, and, after three wasted years when net lending to firms has fallen, the government is belatedly acting. But homeowners facing a cost-of-living crisis will want reassurance from ministers that suddenly taking the scheme away from mortgage lending won't see a rise in mortgage rates."
"Although the growth in household loan volumes remains modest, activity is picking up and house price momentum appears to be gaining momentum," Carney told the chancellor. Business secretary Vince Cable said the changes to FLS were "sensible and welcome", adding: "It is critical it supports growth in the productive economy, rather than simply stoke the housing market."
However, there are no changes to the Help to Buy scheme which the Bank will assess annually from 2014. However, in its half-yearly check on the risks to financial stability the Bank said there was not a risk to the financial system from the housing market. In a letter to Osborne, Carney said: "Although the growth in household loan volumes remains modest, activity is picking up and house price momentum appears to be gaining momentum."
"UK housing market activity is picking up from low level and inflation in house prices – which is already above historical averages on some metrics – appears to be gaining momentum. At present activity remains below long-term trends and underwriting standards are materially higher than before crisis. There is little evidence of an immediate threat to stability," the Bank said in its half-yearly Financial Stability Report (FSR). But there were no changes to the Help to Buy scheme, which the Bank will assess annually from 2014. In Thursday's half-yearly check on the risks to financial stability, the Bank said activity in the housing market remains below long-term trends.
But the FSR said risks could come from further rises in house prices and a buildup in household indebtedness which would be accentuated if underwriting standards on mortgage lending were to be relaxed so it was putting "several actions in train that will guard against a build-up in vulnerabilities". The Bank's financial stability review spelled out the impact that rate rises could have on the most vulnerable households, who have taken on mortgages at high multiples of their incomes and over periods of more than 25 years.
As well as removing the lower capital rules for banks lending for mortgages via the FLS, the Financial Conduct Authority will ask banks to test customers' vulnerability, not just to the scenario of a 3% base rate in five years' time, but also a lengthening in mortgage terms, for instance. These affordability tests will be introduced from April 2014. The Bank of England said it was putting "several actions in train that will guard against a build-up in vulnerabilities". New mortgage affordability tests will be introduced from April 2014.
"The FCA should require mortgage lenders to have regard to any future FPC recommendation on appropriate interest rate stress tests to use in the assessment of affordability," the FPC said.
Frances O'Grady, general secretary of the TUC, said: "This is good news for the real economy, but bad news for the chancellor. The Bank of England is clearly worried that the economic recovery is based on consumers borrowing on the back of rising house prices rather than business investment and rising exports.Frances O'Grady, general secretary of the TUC, said: "This is good news for the real economy, but bad news for the chancellor. The Bank of England is clearly worried that the economic recovery is based on consumers borrowing on the back of rising house prices rather than business investment and rising exports.
"Ensuring that funding for lending works to boost business investment is a sensible policy that can drive sustainable growth and help build a new economy. But stopping over-excitement in the property market may hit the feelgood factor that the chancellor is hoping will distract from the failure of government policy to rebalance the economy." "Ensuring that Funding for Lending works to boost business investment is a sensible policy that can drive sustainable growth and help build a new economy. But stopping over-excitement in the property market may hit the feelgood factor that the chancellor is hoping will distract from the failure of government policy to rebalance the economy."
The Bank said a key risk to financial stability could be caused by an abrupt rise in long-term interest rates and the FCA is working with banks and other firms to ensure they are prepared for this risk. Public sector indebtedness has also risen since the crisis and some households remain vulnerable. "Financial stability risks remain including from the high indebtedness of some sovereigns, corporates and households. These vulnerabilities have been kept in check by low interest rates and other policy interventions," the FSR said. The Bank said a key risk to financial stability could be caused by an abrupt rise in long-term interest rates, and the Financial Conduct Authority is working with banks and other firms to ensure they are prepared for this risk. Public sector indebtedness has also risen since the crisis and some households remain vulnerable. "Financial stability risks remain, including from the high indebtedness of some sovereigns, corporates and households. These vulnerabilities have been kept in check by low interest rates and other policy interventions," the financial stability report said.
Households with loans five times greater than their incomes account for a fifth of total UK mortgage debt.
The FSR spelt out other actions it could take in the future to mitigate risks from the housing market such as making further changes to capital rules.
It also set out more detail about how it might set the so-called leverage ratio, which determines how much capital banks hold against their loans.
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