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Bank of England moves to limit large loans to housebuyers Bank of England moves to limit large loans to housebuyers
(about 1 hour later)
The Bank of England has moved to limit large loans to housebuyers in a first step towards cooling the overheated housing market. The Bank of England signalled on Thursday that it would not impose draconian measures to cool the housing market unless house prices rise more than 20% over the next three years.
Mark Carney, the Bank's governor, has unveiled a range of measures, including tougher checks on whether borrowers can afford to repay their loans when interest rates rise. 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 they would no immediate impact on fast-rising property values.
Carney said he believed there was no immediate threat to the financial system from the housing market, even though prices in London have now breached their 2007 peak. He expects house price inflation to remain at similar levels for the next 12 months, and the Bank's forecasts suggest it would be relaxed about house prices rising another 20% over the next three years. "These actions should not restrain current market housing activity … These actions will have minimal impact in the future in the housing market evolves in line with the bank's central view," Carney said.
"These actions will bite if there is sustained momentum in the coming year," said Carney. 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," he said.
The measures put in place by the Bank would allow it to impose its first ever limits on mortgage lenders from October in the event they make it too easy to get a homeloan. But 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%. 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, and its forecasts suggest it would be relaxed about house prices rising another 20% over the next three years.
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.
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.
"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.
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."
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 that 180,000 average of 2000 to 2007.
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."
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 to their income. 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 to 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.
As well as imposing a limit on the amount lent by banks and building societies, no more than 15% of the total number of loans can be made at a 4.5 loan-to-income multiple. The Bank is also slightly tightening the interest rate being imposed on new borrowers through the new mortgage review.
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.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."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.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. 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.
In terms of loan to income, the whole market is currently at 10% and no lender is thought to be close to the 15% cap which is being readied to bite should lending criteria be relaxed.
"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."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."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."
Through the mortgage market review – which tests customers' ability to keep paying against the expenditure – lenders are already applying a 7% interest rate , which is broadly in line with a 2.5% to 3% "stress" relative to the prevailing market expectations. The bank is now saying this should be closer to 3%.
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.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.