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| Carney Details New Weapons to Cool British Housing Market | Carney Details New Weapons to Cool British Housing Market |
| (35 minutes 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. |
| 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 conduct further checks, or stress testing, on the affordability of mortgage loans. | 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 conduct further checks, or stress testing, on the affordability of mortgage loans. |
| The committee said that mortgage lenders could not extend more than 15 percent of their total number of new residential mortgages at loan-to-income ratios at, or greater than, 4.5 percent. | The committee said that mortgage lenders could not extend more than 15 percent of their total number of new residential mortgages at loan-to-income ratios at, or greater than, 4.5 percent. |
| The rule will be applied by the Prudential Regulation Authority and the Financial Conduct Authority and will apply to lenders who offer residential mortgages totaling more than 100 million pounds, or about $170 million. The rules will take effect on Oct. 1 after a comment period. | |
| 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 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. |
| Home prices in Britain have risen about 10 percent in the past year through April, leading to widespread fear of a potential asset bubble. | 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’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.” | 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.” |
| Still, Mr. Carney said, the committee does not believe that current household indebtedness poses an imminent threat to stability. And he said the new lending rules “should not restrain current housing market activity.” | |
| Banks now do not exceed the new loan-to-income caps, he said, but the limits will prevent lending getting too far ahead of income growth. | |
| “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.” | |
| Some analysts saw the measures as more tentative than what the market was anticipating, and the pound rose slightly against the dollar to more than $1.70. | |
| 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 | 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. | stress tests on banks 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. | 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. |
| 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 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. |
| Bankers all week have been cautioning against rash action. Ross McEwan, chief executive of the Royal Bank of Scotland, the taxpayer-backed lender, 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.” | Bankers all week have been cautioning against rash action. Ross McEwan, chief executive of the Royal Bank of Scotland, the taxpayer-backed lender, 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.” |
| The British Bankers’ Association has cautioned against the committee 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. | The British Bankers’ Association has cautioned against the committee 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. |
| At a speech earlier 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. | At a speech earlier 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. |
| But a key question remains on how the committee’s efforts will play out when interest rates – now at all-time lows – will be raised again. | But a key question remains on how the committee’s efforts will play out when interest rates – now at all-time lows – will be raised again. |
| Mr. Carney has been put under an uncomfortable spotlight over when rates will rise. 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.” | Mr. Carney has been put under an uncomfortable spotlight over when rates will rise. 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.” |
| 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. | 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. |
| 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, 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. |
| The bank, in its second or third iteration of forward guidance, has said it will raise rates partly in response to slack disappearing from the market. | The bank, in its second or third iteration of forward guidance, has said it will raise rates partly in response to slack disappearing from the market. |
| He maintained on Tuesday that the time to “normalize interest rates” – away from the historically low level of 0.5 percent – was “edging closer.” | He maintained on Tuesday that the time to “normalize interest rates” – away from the historically low level of 0.5 percent – was “edging closer.” |
| Already Mr. Carney’s projections have proven 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.” | Already Mr. Carney’s projections have proven 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. | 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.” | 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 chairs 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”. | Andrew Tyrie, the Tory minister who chairs 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. | 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. |